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A  CRITICAL  ANALYSIS 

OF 

INDUSTRIAL  PENSION  SYSTEMS 


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THE  MACMILLAN  COMPANY 

NEW  YORK  •    BOSTON  •     CHICAGO  •    DALLAS 
ATLANTA   •    SAN  FRANCISCO 

MACMILLAN  &  CO..  Lmiteb 

LONDON   •    BOMBAY   •    CALCUTTA 
MELBOURNE 

THE  MACMILLAN  CO.  OF  CANADA,  Lnx 

TOKONTO 


A  CRITICAL   ANALYSIS 

OF 

INDUSTRIAL  PENSION  SYSTEMS 


BY 

LUTHER  CONANT,  Jr. 


THE  MACMILLAN  COMPANY 
1922 

All  rights  reserved 


FEINTED  IN   THE  UNITED  STATES  OP  AMERICA 


Copyright,  1922, 
By  the  macmillan  company 


Set  up  and  printed.    Published  September,  1922. 


Press  of 

J.  J.  Little  &  Ives  Company 

New  York,  U.  S.  A. 


Cto 


U5-a7 


PREFATOEY  NOTE 

In  offering  this  volume  on  industrial  pension  sys- 
tems to  the  public  the  undersigned  desires  to  explain 
that  the  material  was  gathered  in  the  course  of  an 
investigation  of  the  pension  problem  made   for  the 
Bemis  Bro.  Bag  Company,  of  which  Mr.  A.  F.  Bemis 
is  President,  and  that  it  is  through  their  courtesy  that 
the  information  thus  assembled  is  made  available  for 
publication.     It  ohould  be  understood,  however,  that 
^        the  Bemis  Bro.  Bag  Company  assumes  no  responsi- 
)         bility  either  for  the  accuracy  of  the  results  or  for  any 
f^        opinions,  expressed  or  implied. 


LUTHEK  CONANT,  Jb. 
248  Boylston  Street 
Boston,  Mass. 


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CONTENTS 


CHAPTER  PAGE 

I.    Purposes  of  Pension  Systems 

Introductory 1 

Broad  objects  of  pension  systems 4 

Pensions  as  a  means  of  providing  for  dependent 

and  superannuated  workers 5 

Opinions   as   to   the   moral    obligation   of   the 

employer 5 

Affirmative  opinions 8 

Negative  opinions 11 

Attitude    of   labor   in   general    toward   private 

pension  systems 18 

Attitude  of  organized  labor 21 

Pensions  as  a  reward  for  long  service    ....  24 

Pensions  as  a  means  of  increasing  efficiency  .     .  28 

By  eliminating  the  superannuated     ....  31 

By  stimulating  the  active  force 33 

Pensions  as  a  means  of  reducing  labor  turnover  .  37 

Pensions  as  a  means  of  disciplinary  control     .     .  41 
Conclusions  as   to   proper   purposes  of  a  pension 

system        45 

Types  of  pension  systems    ,     ,     , 46 


II.    Non-Contributory  Pensions  of  the  "Discretion- 
ary" Type 

Are  non-contributory  pensions  gratuities?     ...       52 
Non-contributory  pensions  as  deferred  pay  ...       53 
Conclusions  as  to  deferred-pay  issue     ....       64 
Argument  that  a  pension  is  pay  conditionally  de- 
ferred     68 

Conception  of  pension  systems  as  a  form  of  tontine 

insurance  indefensible 72 

Effect  of  non-contributory  pension  systems  on  thrift       75 
Conclusions  as  to  non-contributory  systems  of  the 

"discretionary"  type 78 

vii 


viii  CONTENTS 

CHAPTER  PAOB 

III.    Non-Contributory  Pension  Systems  of  the  "Lim- 
ited-Contractual" Type 

Advantages 88 

Disadvantages 90 

Conclusions  as  to  pensions  of  this  type  ....       91 


IV.    Contributory  Pension  Systems 

Deferred-pay  issue  under  such  systems     ....  97 

Contributory  pension  systems  and  thrift     .     .     .  101 

Progress  of  the  contributory  principle       .     .     .     .  102 

Disadvantages  of  the  contributory  system    .     .     .  105 

Conclusions  as  to  contributory  pension  systems      .  107 


V.    Cumulative    "Single-Premium"    Annuities    as    a 
Substitute  for  Pensions 

Features  of  the  annuity  plan    .     .     .     .     .     .     .  Ill 

General  arguments  in  favor  of  the  annuity  plan     .  113 

Arguments  against  the  annuity  plan  analyzed     .     .  118 

Summary  and  conclusions 126 


VI.    Informal  Pension  Policy  vs.  a  Formal  System 

Advantages 133 

Disadvantages 134 

Summary  and  conclusions 142 


Vll.    Cost  op  Pension  Systems 

Methods  of  financing  a  pension  system  ....  146 

Systems  without  withdrawal  or  death  benefits  .     .  150 
Systems    providing     for    withdrawal     and    death 

benefits 153 

Long-continued  increase  in  pension  disbursements  156 

Actual  experience  under  private  pension  plans  .     .  158 

B.  &  O.  R.  R.  Co 158 

American  Sugar  Refining  Company       ....  163 

Otis  Elevator  Company 164 

U.  S.  Steel  Corporation       ■   ^ 165 

Cost  of  meeting  "accrued  liabilities" 172 

Costs  under  an  informal  pension  policy  ....  177 
Need  of  actuarial  estimates  in  establishment  of  a 

pension  system 180 


CONTENTS  ix 


CHAPTER  PAGE 

VIII.    Cost  of  a  Citmulativb  Annuity  System 

Illustrative    example 189 

Problem  of  "accrued  liabilities"  under  an  annuity 

system        192 


IX.    Benefits  to  be  Included  in  a  Pension  or  Annuity 

System 

The  retirement  benefit 201 

The  total  disability  benefit 203 

The  death  benefit 203 

The  withdrawal  equity 206 

Sickness  benefit  inadvisable 208 

Provision  for  widows  and  children  impracticable   .  209 

Amount  of  benefit 210 

Arbitrary  retirement  age  objectionable    ....  214 


X.    Summary  and  Conclusions 

Comparative  analysis   of  various   types   of  retire- 
ment  systems 220 

Broader  aspects  of  the  pension  problem  ....     226 

Appendices 231-254 

Index 255-262 


TABLES 

PAGE 

1.  Schedule  of  considerations  (for  males)  at  various  ages 

necessary  to  provide  a  paid-up  annuity  of  $10  to 
commence  at  age  sixty-five 120 

2.  Payments  to  pensioners  and   amounts  appropriated 

by  the  company  under  Baltimore  and  Ohio  Rail- 
road Company's  non-contributory  pension  plan 
1885-1915 161 

3.  Ratio  of  pensioners  to  membership  in  Relief  Asso- 

ciation twenty-five  years  earlier  under  Baltimore 
and  Ohio  Railroad  Company's  pension  plan  1883- 
1891 162 

4.  Pension  disbursements  of  American  Sugar  Refining 

Company,  1912-1920 163 

5.  Pension  disbursements   of  Otis   Elevator  Company, 

1913-1920 165 

6.  Pension  disbursements  and  number  of  active  cases  on 

the  pension  roll  under  United  States  Steel  Cor- 
poration's pension  plan,  1911-1920 166 

7.  Average  age,  average  service,  and  average  pension 

under  the  United  States  Steel  Corporation's  pen- 
sion plan,  1911-1920 167 

8.  Classification  of  pension  cases  under  United  States 

Steel  Corporation's  pension  plan,  1911-1920  .     .     .      168 

9.  Illustration  of  cumulative  increase  in  pension  outlay 

under  an  informal  pension  policy  on  various  as- 
sumed  bases 178 

10.  Method  of  computing  cost,  for  first  year,  of  paid-up 

annuities  for  $10  each  for  a  group  of  500  male 
workers,  all  of  whom  have  completed  at  least  five 

years  of  service 189 

zi 


CHARTS 

PAGE 

Chart  I.  Curves  showing  estimated  course  of  pension  ex- 
penditures over  a  long  period  of  years,  under  three 
different  plans 157 

Chart  II.  Curves  showing  annual  expenditures  required 
of  the  permanent  school  pension  fund  of  the  city  of 
Boston  during  future  years  under  existing  sal- 
aries and  without  increase  in  force 159 


A  CRITICAL 

ANALYSIS  OF  INDUSTRIAL 

PENSION  SYSTEMS 

CHAPTER  I 

PURPOSES  OF  PENSION   SYSTEMS 

Introductory 

"Pensions  are  more  irrevocable  than  any  or- 
dinary kind  of  legislation."  This  statement, 
while  applied  by  the  author  ^  to  governmental 
pension  systems,  is  almost  equally  applicable  to 
private  pension  schemes.  A  pension  system  never 
should  be  started  by  an  employer  until  he  has 
satisfied  himself  beyond  reasonable  doubt  that  it 
will  be  continued.  An  establishment  may  suffer 
little  because  it  does  not  adopt  a  pension  sys- 
tem. But  it  may  suffer  much  if  it  adopts  a  sys- 
tem without  most  careful  examination. 

Many  industrial  corporations  have  studied  the 

problem  long  and  carefully  without  reaching  a 

decision.     Some  apparently    have    decided  defi- 

*  Geoffrey  Drage.    "The  Problem  of  the  Aged  Poor." 

1 


2  INDUSTRIAL  PENSION  SYSTEMS 

nitely  against  a  formal  system.  Many  others, 
which  have  adopted  plans  without  such  careful 
study,  have  been  compelled  almost  immediately 
to  revise  them.  It  has  been  stated  that  very  few 
of  the  industrial  pension  plans  in  the  United 
States  to-day  are  so  financed  that  they  are  likely 
to  remain  solvent  without  refinancing  or  modifi- 
cation. "With  that  staggering  fact  staring  them  in 
the  face,  it  is  no  wonder  that  sensible  business 
executives  refuse  to  be  stampeded  into  adoption 
of  pension  plans."  ^ 

In  the  case  of  many  municipal  and  other  pub- 
lic service  pension  plans,  failure  carefully  to 
count  the  cost  has  already  resulted  in  bankruptcy 
of  the  pension  system,  either  actual  or  construc- 
tive. Indeed,  it  is  hardly  too  much  to  say  that 
the  history  of  pension  schemes  has  been  a  record 
of  mistakes  or  failures.  Even  the  elaborate 
Carnegie  Foundation  plan  was  forced  to  undergo 
a  radical  reorganization  only  a  few  years  after 
it  was  started. 

The  financial  aspects  of  the  question,  more- 
over, important  as  they  are,  are  of  subordinate 
consequence  as  compared  with  the  broad  eco- 
nomic and  social  aspects. 

The  problem  is  an  exceedingly  complex  one. 

*  "Pensions  for  Industrial  Employees."  Elmer  B.  Tolsted  in 
Cotton,  November,  1920. 


PURPOSES  OF  PENSION  SYSTEMS  3 

The  very  nature  of  a  pension  is  by  no  means 
generally  understood  or,  indeed,  easily  definable. 
The  word  "pension"  has  come  to  have  a  very 
loose  significance,  and  often  is  applied  to  pay- 
ments which  in  a  strict  sense  are  not  pensions 
at  all.  The  various  types  of  pension  systems 
present  differences  so  marked  that  they  cannot 
be  intelligently  discussed  as  a  single  group.  Argu- 
ments applicable  to  public  service  pensions  may 
not  hold  in  the  case  of  private  systems.  Finally, 
it  is  extremely  difficult  to  determine  the  ultimate 
effects  of  such  systems,  not  merely  upon  the 
worker's  eflBciency  and  his  material  well-being, 
but  even  upon  his  character.  A  system  which 
upon  its  face  is  well  adapted  to  meet  an  imme- 
diate condition  may  produce  evils  far  worse  than 
those  which  it  seeks  to  remedy. 

A  leading  British  actuary  in  discussing  general 
old  age  pensions  has  said:  ^ 

"The  real  fact  is,  that  the  more  one  studies 
such  a  thorny  question  as  this,  the  more  numerous 
and  the  greater  are  the  difficulties  which  become 
apparent,  and  the  more  it  is  seen  that,  if  the 
working  classes  for  whose  benefit  old  age  pensions 
are  advocated  are  not  to  be  injured  rather  than 
assisted,  the  utmost  caution  and  deliberation 
must  be  exercised  before  any  irrevocable  step  be 
taken," 

'  George  King ;   cited  by  Lee  Welling  Squier  in  "Old  Age 
Dependency  in  the  United  States,"  p.  277. 


4  INDUSTRIAL  PENSION  SYSTEMS 

It  is,  therefore,  almost  imperative,  before  tak- 
ing up  the  question  how  a  pension  system  shall 
be  established,  to  consider  whether  it  should  be 
established  at  all.  Until  a  satisfactory  answer 
can  be  given  to  the  latter  question,  there  is  little 
occasion  to  discuss  the  question  of  method. 


Broad  Objects  of  Pension  Systems 

Among  the  more  important  motdves  which 
lead  industrial  employers  to  adopt  pension  sys- 
tems are: 

A  desire  to  provide  for  the  old  age  of  de- 
pendent, superannuated  employees. 

A  desire  to  reward  employees  who  have  ren- 
dered unusually  long  service. 

A  desire  to  increase  efficiency,  first,  by  the  elim- 
ination of  superannuated  or  incapacitated  work- 
ers on  a  humane  basis  and,  second,  by  stimulating 
the  good  will  and  effort  of  the  active  force. 

A  desire  to  hold  the  worker  to  the  job,  thereby 
reducing  labor  turnover. 

A  desire  to  exercise  a  disciplinary  control  over 
workers  in  respect  to  strikes  and  in  other  ways. 

In  some  pension  plans  all  of  these  motives  are 
present;  in  others,  only  a  portion. 

The  broad  objects  of  pension  systems,  as  above 
enumerated,  will  now  be  examined. 


PURPOSES  OF  PENSION  SYSTEMS  5 

Pensions  as  a  means  of  providing  for  dependent 
and  superannuated  workers 
A  large  number,  perhaps  a  large  proportion, 
of  industrial  workers  either  can  not  or  do  not 
make  adequate  provision  for  their  old  age.  When 
such  workers  reach  a  stage  of  superannuation 
the  employer  is  faced  with  the  alternative  of 
throwing  them  back  on  society,  with  the  knowl- 
edge that  they  will  become  objects  of  charity, 
or  of  himself  making  some  provision  for  their 
remaining  years.  This  practical  fact  has  been 
an  important  and  probably  the  controlling  con- 
sideration in  the  establishment  of  industrial  pen- 
sion systems  of  the  day.  From  humanitarian  mo- 
tives the  employer  is  not  content  summarily  to 
dismiss  such  superannuated  workers  after  long 
years  of  service.  Moreover,  he  often  hesitates 
to  do  this,  on  the  practical  ground  that  such  a 
policy  may  have  an  unfavorable  reaction  upon 
the  larger  body  of  employees  still  continuing  in 
the  service. 

Opinions  as  to  the  moral  obligation  of  the  em- 
ployer. At  the  outset  it  is  important  to  determine 
whether  the  employer  is  really  under  a  moral 
obligation  to  make  provision  for  such  workers. 
Clearly,  if  such  a  moral  obligation  exists,  it  should 
be  met. 


6  INDUSTRIAL  PENSION  SYSTEMS 

The  idea  has  a  strong  appeal.  The  worker  has 
rendered  a  lifetime  of  service,  yet  for  one  reason 
or  another  may  not  have  acquired  a  competence.. 
Worn  out  with  years  of  labor,  he  is  no  longer 
able  to  secure  employment.  Is  not  the  employer, 
therefore,  properly  to  be  charged  with  the  respon- 
sibility of  maintaining  him  in  his  old  age? 

Some  writers  on  the  pension  problem  insist 
that  there  is  such  an  obligation.  Some  industrial 
managers,  moreover,  have  accepted  this  point  of 
view.  While  the  contention  has  been  set  forth 
in  various  ways,  it  may  be  epitomized  in  the 
statement  that  "Industry  should  not  'scrap'  its 
old  and  incapacitated  workers  and  throw  them 
back  on  society  in  their  dependent  age." 

In  the  opinion  of  many  other  students  of  social 
problems,  however,  there  is  no  such  obligation. 
Instead,  these  critics  hold  that  the  responsibility 
for  providing  against  old  age  rests  primarily  upon 
the  individual  himself  or,  at  least,  that  it  cannot 
fairly  be  placed  upon  the  employer  alone.  They 
argue  that,  while  the  employer  may  elect  to  pro- 
vide for  his  superannuated  workers  when  they 
have  completed  their  service,  he  is  under  no  moral 
obligation  to  do  this.  Some,  furthermore,  contend 
that  any  attempt  to  relieve  the  individual  of  his 
responsibility  is  certain  to  have  a  deteriorating 
influence  upon  private  character,  by  diminishing 


PURPOSES  OF  PENSION  SYSTEMS  7 

the  qualities  of  self-reliance,  thrift,  and  even 
self-respect. 

The  general  attitude  of  employers  on  this 
point  is,  perhaps,  sufficiently  indicated  by  the 
fact  that  the  great  majority  of  private  pension 
plans  now  in  operation  in  industrial  establish- 
ments specifically  deny  any  right  on  the  worker's 
part  to  a  retirement  benefit,  and  place  this  on 
the  basis  of  a  gratuity. 

The  argument  that  the  employer  is  under  a 
moral  obligation  to  provide  for  the  old  age  of 
his  workers  is  reflected  in  the  following  excerpt 
from  a  discussion  by  Squier  in  his  ''Old  Age  De- 
pendency in  the  United  States":  ^ 

"From  the  standpoint  of  the  whole  system  of 
social  economy,  no  employer  has  a  right  to  en- 
gage men  in  an  occupation  that  exhausts  the 
individual's  industrial  life  in  ten,  twenty,  or  forty 
years;  and  then  leave  the  remnant  floating  on 
society  at  large  as  a  derelict  at  sea.  From  the 
standpoint  of  public  economy,  it  is  argued  that 
every  industry  should  be  compelled  to  bear  its 
own  burden  of  waste,  whether  of  material,  ma- 
chinery, or  human  life;  that  it  is  as  equally  un- 
just and  improvident  for  an  industry  to  turn 
adrift  its  wornout  and  aged  employees,  to  be  taken 
up  and  housed  at  public  expense  in  almshouses, 
as  it  is  for  the  employee  himself  to  stop  work 
and  become  a  tramp  or  vagrant." 

*  Lee  Welling  Squier.    "Old  Age  Dependency  in  the  United 
States,"  pp.  272-3. 


8  INDUSTRIAL  PENSION  SYSTEMS 

A  similar  viewpoint  has  been  expressed  by 
many  other  writers  on  the  pension  problem. 

In  an  effort  to  assemble  further  opinion  upon 
this  question,  an  inquiry  was  submitted  to  a  con- 
siderable number  of  economists,  publicists,  and 
social  workers  of  the  country,  in  the  following 
form: 

"What  is  the  moral  obligation,  if  any,  of  the 
industrial  employer  towards  his  employees  with 
respect  to  support  in  their  old  age?" 

A  representative  selection  of  the  views  thus 
obtained  is  presented  herewith. 

Affirmative  opinions.  An  afl&rmative  position 
on  this  question  was  taken  by  John  R.  Commons, 
of  the  University  of  Wisconsin,  as  follows: 

"On  the  whole,  I  do  not  think  that  wage  earn- 
ers, under  existing  conditions,  can  be  expected 
to  provide  for  old  age.  This  is  on  account  of 
the  great  uncertainties  and  insecurity  of  their 
work  and  the  fact  that  they  should  be  expected 
to  support  their  children  and  give  them  an  edu- 
cation, etc. 

"Considering  these  matters,  I  should  say  that 
there  is  a  moral  obligation  on  the  individual  em- 
ployer consisting  in  making  some  provision  for 
his  employees  in  old  age,  increasing  with  their 
length  of  service,  but  that  there  are  limits  to 
this  obligation  in  individual  cases  and  that  the 
total  obligation  is  a  joint  obligation  upon  Indus- 


PURPOSES  OF  PENSION  SYSTEMS  9 

try  and  upon  the  public  which  cannot  be  met 
except  by  legislation." 

Frank  A.  Fetter,  of  Princeton  University: 

"If  the  old  age  of  wage-earners  is  not  other- 
wise provided  for,  the  moral  sense  of  our  time 
surely  recognizes  that  the  obligation  of  the  em- 
ployer has  not  been  fully  met  in  the  case  of 
workers  who  have  grown  old  in  his  service." 

Several  of  those  who  took  the  ground  that  there 
was  a  moral  obligation  to  provide  for  the  super- 
annuation of  industrial  workers  argued  that  the 
obligation  could  not  fairly  be  placed  upon  the  in- 
dividual employer  but,  rather,  fell  upon  Industry 
as  a  whole.  Thus,  Franklin  H.  Giddings,  of  Co- 
lumbia University,  said: 

"I  cannot  see  that  the  individual  employer  is 
under  any  moral  obligation  to  support  his  em- 
ployees in  their  old  age  by  pension  or  otherwise. 
But  I  do  think  that  the  industry  as  a  whole 
should  for  many  reasons,  many  of  them  mere  ex- 
pediencies, assume  the  obligation.  By  this  I 
mean  that  the  charge  which  the  industry  makes 
upon  the  public  in  the  prices  of  goods  should  in 
the  long  run  provide  for  the  old  age  of  employees 
who  have  been  long  connected  with  it  and  whose 
service  has  been  faithful." 

William  M.  Leiserson,  Chairman  of  the  Labor 
Adjustment  Board  of  the  Rochester  Clothing  In- 
dustry, likewise,  held  that  "there  must  be  consid- 


10         INDUSTRIAL  PENSION  SYSTEMS 

erable  doubt  as  to  the  moral  obligation  of  an  in- 
dividual employer  toward  his  superannuated  em- 
ployees; but  there  can  be  no  doubt  whatever 
that  an  industry  has  a  distinct  moral  obligation 
not  to  throw  on  the  scrap-heap  men  who  have 
devoted  their  lives  to  the  industry  and  have  worn 
themselves  out  in  its  service."  He  suggested  that 
the  burden  of  a  pension  system  might  be  too  great 
for  a  small  employer,  but  that  in  such  cases  an 
association  of  small  employers  in  a  given  industry 
might  distribute  the  burden  in  such  a  way  as  to 
make  a  pension  system  practicable.  He  con- 
tended, however,  that  "a  large  employer  whose 
business  forms  a  substantial  portion  of  the  in- 
dustry as  a  whole  owes  it  to  the  workers  whom 
he  has  drawn  into  the  industry  and  who  have 
dedicated  their  lives  to  it,  that  they  shall  be 
taken  care  of  in  their  old  age." 

Rev.  John  A.  Ryan,  D.D.,  Director  of  the 
National  Catholic  Welfare  Council: 

"It  is  quite  clear  to  me  that  industry,  as  a 
whole,  is  morally  bound  to  provide  the  workers 
as  a  whole  with  sufficient  income  to  meet  not 
only  present  needs,  but  all  the  normal  contin- 
gencies of  life,  including  disability  and  old  age. 
Whether  this  provision  should  aU  be  made  in 
the  form  of  wages,  leaving  the  employee  to  in- 
sure himself  against  all  these  contingencies,  or 
whether  the  current  wages  should  merely  meet 


PURPOSES  OF  PENSION  SYSTEMS         11 

current  living  costs,  insurance  to  be  provided 
by  the  industry,  is  a  question  of  method  rather 
than  principle. 

"All  this  refers  to  industry  as  a  whole.  What 
the  obligation  of  an  individual  concern  is  toward 
those  persons  that  it  has  at  any  given  time  in  its 
employ,  is  a  more  complex  and  difficult  question, 
inasmuch  as  many  of  these  employees  have  spent 
a  greater  or  less  portion  of  their  working  life  in 
the  employ  of  other  concerns.  Therefore,  their 
present  employer  cannot  fairly  be  required  to 
make  the  whole  provision  for  their  future.  The 
general  principle  seems  to  me  clear  enough,  that 
the  employer  is  under  obligation  to  provide  each 
of  his  employees  during  a  given  period,  say,  a 
year,  with  that  amount  of  insurance  for  old  age 
which  is  proportionate  to  the  total  amount  of 
such  necessary  provision.  For  example,  if  the 
total  working  period  of  an  employee  is  forty 
years,  then  the  employer  ought  to  provide  one- 
fortieth  of  the  total  necessary  old  age  pension 
every  year." 

The  various  statements  above  given  clearly 
contain  a  suggestion  that  the  industrial  employer 
or,  at  least,  Industry  as  a  whole,  is  under  a 
moral  obligation  to  provide  for  the  support  of 
superannuated  employees.  It  should  be  noted 
that  some  of  the  opinions  to  this  efiFect  are 
qualified. 

Negative  opinions.  As  opposed  to  the  idea  of  a 
moral  obligation,  but  not  necessarily  in  opposi- 


12         INDUSTRIAL  PENSION  SYSTEMS 

tion  to  pension  systems,  the  following  statements 
may  be  cited: 

Dr.  Arthur  T.  Hadley  of  Yale  University: 

"The  question  what  form  the  moral  obligation 
of  the  employer  should  take  regarding  the  pen- 
sion system  involves  the  whole  question  of  the 
structure  of  industrial  society. 

"Under  the  old-fashioned  system,  where  it  was 
supposed  to  be  each  man's  duty  to  save  as  far 
as  he  could,  the  idea  prevailed  in  this  country 
that  the  possible  withholding  of  wages  in  order 
to  provide  a  fund  for  a  pension  system  was  an 
unwarranted  attempt  to  keep  the  employee  un- 
der the  guardianship  of  the  employer;  that  the 
fullest  right  was  done  by  paying  the  highest 
w^ages  the  market  afforded,  without  any  with- 
holding; and  that  all  disability  payments,  from 
whatever  cause,  should  be  based  on  the  needs  of 
each  particular  case,  rather  than  claimed  as  a 
right. 

"As  long  as  most  of  the  employees  were  am- 
bitious to  become  capitalists,  and  did  save  money, 
this  worked  well.  The  fact  that  they  fail  to  feel 
this  ambition  or  make  these  savings  to-day  is, 
however,  an  unfortunate  fact  with  which  we  have 
to  deal;  and  pension  systems  are  one  of  the 
means  by  which  we  deal  with  it.  I  find  it,  how- 
ever, a  little  hard  to  speak  of  the  moral  obliga- 
tion to  adopt  a  pension  system,  when  the  old 
system,  under  which  we  did  not  have  to  pay 
pensions  at  all,  was  better  than  the  new  one, 
when  we  utilize  them  to  meet  an  evil  which  we 


PURPOSES  OF  PENSION  SYSTEMS         13 

cannot  deal  with  otherwise.  I  think  we  shall 
stand  on  clearer  ground  if  we  base  our  pension 
systems  on  expediency  rather  than  on  morals.' 

Henry  W.  Farnam  of  Yale  University: 

"I  do  not  hold  that  the  individual  employer 
has  a  moral  obligation  to  support  his  employees 
in  their  old  age.  The  mere  fact  that  employees 
change  so  frequently  in  industrial  establishments 
and  that  so  few  of  them  work  for  very  many  years 
in  one  place,  would  clearly  make  the  obligation, 
if  it  existed,  one  to  be  borne  by  a  number  of  dif- 
ferent employers;  it  would  certainly  be  unfair  to 
expect  the  last  employer  to  bear  the  entire 
charge. 

"I  look  upon  social  insurance  as  a  practical 
matter  to  be  adopted  in  the  interest  of  society 
as  a  whole  and  I  therefore  believe  that  the  old 
age  pension  should  be  a  social  obligation  to  be 
financed  by  the  worker  himself,  the  employers  as 
a  group,  and  society  as  a  whole  through  its  tax- 
payers." 

T.  N.  Carver  of  Harvard  University: 

"I  have  never  heard  or  read  a  satisfactory  argu- 
ment to  show  that  the  employer  was  under  any 
moral  obligation  whatsoever  in  the  matter  of  in- 
dustrial pensions.  The  reasons  given  have  always 
seemed  to  me  to  be  singularly  inconclusive.  I 
am  inclined  to  think  that  the  only  sound  reason 
on  which  to  base  a  system  of  industrial  pensions 
is  a  purely  economic  one.  If  the  industry  is  likely 
to  be  permanent,  or  at  least  to  outlast  several 


14         INDUSTRIAL  PENSION  SYSTEMS 

generations  of  men,  the  management  must  decide 
whether  they  think  it  will  pay  in  the  long  run 
to  pension  employees.  If  it  will  enable  the  in- 
dustry to  secure  and  maintain  a  superior  quality 
of  employees  and  keep  them  in  a  frame  of  mind 
which  will  increase  their  usefulness  and  produc- 
tivity, that  would  furnish  a  valid  ground  for  a 
pension  system.  That,  I  believe,  is  the  one  sat- 
isfactory argument  in  favor  of  pensions,  or  re- 
tiring allowances,  for  university  professors.  .  .  . 
This  has  always  seemed  to  me  a  suflQcient  and 
satisfactory  reason  for  a  system  of  pensions, 
without  bringing  in  the  question  of  moral  ob- 
ligation." 

Edward  T.  Devine,  of  the  Association  for  Im- 
proving the  Condition  of  the  Poor,  New  York 
City,  held  that  while  it  is  desirable  that  Industry 
shall  bear  the  burden  of  accidents  and,  to  a  large 
extent,  the  hazard  of  disability  among  workers, 
it  should  not  be  called  upon  to  assume  the  bur- 
den of  their  support  in  old  age.  He  contended 
that  the  responsibility  of  Industry  in  reference 
to  old  age  lies  chiefly  in  ensuring  such  conditions 
of  work  that  employees  will  not  become  worn  out 
before  they  should  be,  and  in  paying  wages  that 
permit  the  individual  to  make  a  provision  against 
his  superannuation.  "Individuals  who  become 
dependent  because  of  old  age  are,  of  course,  a  re- 
sponsibility for  the  community,  but  should  not 
be  a  charge  on  Industry." 


PURPOSES  OF  PENSION  SYSTEMS         15 

Many  who  oppose  the  idea  that  the  employer 
is  under  a  moral  obligation  to  provide  for  super- 
annuated employees  take  the  ground  that  the 
primary  duty  and,  indeed,  the  full  duty  of  the 
employer  is  to  pay  adequate  wages  and  that  when 
this  is  done  workers  may  properly  be  required 
to  care  for  themselves  in  old  age.  This  viewpoint 
is  illustrated  in  the  following  statement  by  W.  Z. 
Ripley,  of  Harvard  University: 

"My  predilection  is  all  for  such  recognition 
of  the  workers'  rights  in  adequate  wages  as  shall 
force  him  to  meet  the  problem  of  old  age  for 
himself.  I  conceive  that  the  coddling  process 
softens  both  the  fiber  of  the  employee  and  of 
the  employer.  It  tempts  the  employer  to  seek 
welfare  as  an  alternative  for  paying  full  measure 
of  wages,  and  it  leads  the  employee  to  lean  upon 
a  beneficent  despot  who  shall  protect  him  against 
the  shocks  of  adversity.  Consequently  I  person- 
ally reject  the  conception  of  moral  obligation,  but 
would  substitute  for  it  what  seems  to  me  a  more 
virile  view,  that  wage  relationships  should  be  es- 
tablished in  the  light  of  mutual  respect  and  even 
apprehension  upon  a  level  which  will  permit  the 
workers  to  take  care  of  themselves." 

Miss  Julia  C.  Lathrop,  former  Chief,  Children's 
Bureau,  U.  S.  Department  of  Labor: 

'Tt  appears  to  me  clear  that  the  obligation  of 
the  employer  ceases  when  he  has  paid  an  ade- 
quate wage,  by  which  is  understood  a  wage  per- 


16         INDUSTRIAL  PENSION  SYSTEMS 

mitting  decent  living  and  a  reasonable  margin 
for  savings  during  the  period  of  employment,  ex- 
cept as  he  may  be  joined  with  the  employee  and 
the  State  in  a  system  of  retirement  or  old  age 
insurance." 

The  following  statement  by  W.  E.  H.  Lecky, 
while  dealing  with  general  old  age  pensions,  may 
fairly  be  cited  in  this  connection:^ 

"There  is  no  real  ground  for  the  assertion  that 
because  an  industrious  man  has  failed  to  earn  a 
sufficiency,  he  has  a  moral  right  to  be  rewarded 
for  his  industry  out  of  the  proceeds  of  a  tax  levied 
upon  his  neighbors,  to  whom  he  has  rendered  no 
service,  or  none  which  has  not  been  paid  for  in 
wages." 

It  should  be  repeated  that  the  above  state- 
ments do  not  necessarily  mean  that  these  writers 
condemn  pension  systems.  The  question  at  the 
moment  is  whether  the  employer  is  under  a  moral 
obligation  to  provide  for  the  superannuation  of 
his  employees.  One  may  reject  the  concept  of 
a  moral  obligation,  yet  advocate  a  pension  sys- 
tem on  other  grounds. 

Thus  John  A.  Fitch,  a  well-known  writer  on 
labor  matters,  expressed  the  opinion  that  the 
problem  of  old  age  dependency  is  a  "social  in- 
stead of  an  industrial  problem,  and  that  the  only 

'W.  E.  H.  Lecky.    "Old  Age  Pensions:  Collection  of  Short 
Papers,"  p.  103. 


PURPOSES  OF  PENSION  SYSTEMS        17 

proper  solution  of  the  question  is  a  government 
pension."  Since,  however,  this  was  not  likely  to 
come  in  the  immediate  future  and  since,  in  the 
meantime,  employers  are  confronted  with  the 
problem  of  superannuation,  he  held  that  employ- 
ers were  not  only  justified,  but  wise,  in  establish- 
ing pension  systems.  A  particular  reason  for 
this  was  that  when  an  employer  "gets  stability 
in  addition  to  day's  work,  he  has  received  a  value 
over  and  above  what  be  has  paid  for  through 
the  wage." 

A  fair  summarization  of  these  divergent  views 
is  that,  on  the  whole,  pensions  are  a  matter  of 
expediency  rather  than  of  moral  obligation,  and 
that  in  so  far  as  an  employer  feels  under  com- 
pulsion to  provide  for  the  old  age  of  his 
workers,  this  arises  from  humanitarian  con- 
siderations engendered  by  association,  rather 
than  from  the  existence  of  a  definite  right 
on  the  workers'  part.  It  will  be  noted 
that  several  of  those  who  maintain  that  a 
moral  obligation  exists  hold  that  this  does  not 
fall  solely  on  the  individual  employer,  but  on 
Industry  in  general,  or  upon  employers,  em- 
ployees, and  the  public  jointly. 

If  the  theory  of  a  moral  obligation  on  the  part 
of  the  employer  holds  anywhere,  it  would  seem 
obvious  that  it  should  obtain  in  the  case  of  the 


18         INDUSTRIAL  PENSION  SYSTEMS 

Government  as  employer.  Yet  most  disinterested 
students  of  governmental  pension  systems  reject 
the  idea  of  obligation  and  base  their  advocacy  of 
such  systems  on  the  practical  ground  of  expe- 
diency. Thus,  one  writer  on  government  pension 
systems  has  said: 

"Sentimental  arguments  are  sometimes  ad- 
vanced to  prove  that  the  Government  owes  some 
special  charity  to  the  men  who  have  grown  gray 
in  its  service.  .  .  .  They  are  no  more  entitled 
to  public  charity  and  benevolence  than  men  who 
have  grown  gray  in  some  private  capacity.  Pub- 
lic contributions  to  a  retirement  system  are  to  be 
justified,  not  on  any  ground  of  benevolence  or 
philanthropy,  but  on  the  ground  that  they  are 
payments  to  improve  the  character  of  the  ser- 
vice." 1 

Attitude  of  Labor  in  general  toward  private 
pension  systems.  Perhaps  the  most  convincing  ar- 
gument on  this  point  is  found  in  the  attitude  of 
Labor  itself.  One  of  the  significant  facts  of  the 
pension  problem  is  that  the  demand  for  pension 
systems  comes  from  the  employer  and  from  the 
public  rather  than  from  the  worker.  At  best, 
the  attitude  of  Labor  toward  pensions  is  one  of 
comparative  indifference.  It  is  true  that  employ- 
ers who  have  inaugurated  pension  systems  often 

^  Lewis  Meriam.     "Principles  Governing  the  Retirement  of 
Public  Employees,"  pp.  16  and  17. 


PURPOSES  OF  PENSION  SYSTEMS         19 

have  received  expressions  of  appreciation  from 
the  recipients  of  the  pension  benefits.  Replies 
from  a  large  number  of  employers  as  to  the  at- 
titude of  their  workers  were  secured  in  the  course 
of  this  study.  Representative  statements  on  this 
point  are  given  below: 

"The  plan  has  been  well  received  by  the  em- 
ployees, and  that  it  is  highly  appreciated  is  evi- 
denced by  the  many  letters  received  from  grate- 
ful beneficiaries." 

"Our  opinion  of  the  plan  is  that  it  is  well  re- 
ceived and  appreciated  by  the  employees,  par- 
ticularly those  who  have  been  with  the  company 
for  a  number  of  years  and  who  are  approaching 
the  age  of  retirement." 

"We  know  that  our  employees,  particularly 
those  w^ho  are  no  longer  young,  are  very  favor- 
ably impressed  with  our  pension  system." 

"Our  pension  system  is  very  much  appreciated 
by  all  classes  of  workers.  They  know  it  is  a  re- 
ward for  faithful  service  and  all  apparently  fully 
appreciate  its  advantages." 

"We  believe  our  annuity  plan  is  contributing 
in  making  our  personnel  happy  and  contented, 
although  you  will,  of  course,  realize  that  this  plan 
is  but  one  feature  of  our  general  policy." 

On  their  face  these  statements  indicate  decided 
appreciation.  But  the  fact  that  such  apprecia- 
tion is  seldom  reflected  in  a  reduced  labor  turn- 


20         INDUSTRIAL  PENSION  SYSTEMS 

over/  which  would  be  its  most  natural  expres- 
sion, robs  this  evidence  of  much  of  its  apparent 
significance. 

At  least  it  is  certain  that  Labor  has  conducted 
no  active  campaign  to  secure  the  inauguration  of 
private  pension  systems.  Instead,  the  almost 
universal  attitude  of  Labor  may  be  found  in  some 
such  slogan  as  "Give  it  to  us  in  the  pay  envelope/' 
or  "Labor  wants  justice,  not  pensions." 

This  attitude  of  Labor  towards  private  pen- 
sion systems  is  further  illustrated  by  the  following 
extract  from  testimony  before  a  British  Retire- 
ment Commission: 

"We  have  a  number  of  artisans  who,  about  five 
years  ago,  petitioned  that  they  might  be  put  en- 
tirely upon  trades  union  rate  of  wages  and  the 
option  was  given  to  them,  either  to  remain  under 
the  terms  they  were  with  pensions  or  to  go  at  once 
to  trade  union  terms,  and  these  four  hundred  men 
elected  to  have  a  larger  immediate  salary  and 
forego  aU  the  rights  to  pension  and  sick  pay  and 
that  kind  of  thing."  ^ 

This  feeling  is,  moreover,  characteristic  of  sal- 
aried workers,  as  well  as  of  wage-earners.  This 
is  indicated  by  the  following  result  of  a  vote  of 

^  See  p.  37. 

*  Sir  J.  McDougal,  of  the  London  County  Council,  testifying 
before  the  British  Royal  Commission  of  Superannuation  in 
the  Civil  Service,  British  Parliamentary  Papers,  1903,  Vol. 
XXXIII,  p.  138. 


PURPOSES  OF  PENSION  SYSTEMS         21 

employees  of  the  State,  War,  Navy,  and  Treasury 
Departments  at  Washington  in  1911: 

For  immediate  increase  in  salaries  inde- 
pendent of  any  retirement  or  pension 
legislation  7,459 

For  immediate  provision  for  increase  in 
salaries  accompanied  by  straight  pen- 
sions provided  wholly  by  the  Gov- 
ernment          1,465 

For  immediate  provision  for  increase  in 
salaries  accompanied  by  retirement 
on  annuities  provided  by  compulsory 
savings  by  employees 1,067 

For  immediate  provision  for  retirement 
on  straight  pension  provided  wholly 
by  the  department  317 

For  immediate  provision  for  retirement 
on  annuities  provided  by  compulsory 
savings  by  employees 186 

10,494 

Attitude  of  Organized  Labor.  The  attitude  of 
Organized  Labor  toward  private  pension  systems 
is,  at  least  in  many  cases,  not  merely  one  of  in- 
difference, but  of  definite  hostility.  In  this  con- 
nection the  following  statement  by  Samuel 
Gompers,  president  of  the  American  Federation 
of  Labor,  obtained  in  the  course  of  this  study, 
may  be  noted: 


22         INDUSTRIAL  PENSION  SYSTEMS 

"Paternalism  either  in  government  or  in  in- 
dustry is  abhorrent.  It  takes  away  the  initiative 
of  the  workers  who  should  themselves  prepare  for 
old  age  or  the  proverbial  'rainy  day.'  Where  the 
workers  receive  an  adequate  wage,  one  that  will 
permit  them  to  live  as  an  American  should  live, 
they  will  provide  their  own  pension  system,  and 
whatever  men  do  for  themselves  increases  their 
value  as  workers.  It  brings  independence  and  a 
desire  to  live  as  men  should  live  without  fear  of 
losing  that  which  will  protect  them  in  their  old 
age."  1 

The  head  of  a  local  labor  union  expressed  a 
similar  point  of  view  as  follows: 

"What  the  workers  want  is  a  sufficient  wage 
so  that  they  can  pay  for  their  own  protection 
without  charity  either  from  employers  or  any 
one  else.  Labor  does  not  believe  in  industrial 
welfare  work  of  any  kind,  because  it  is  done  with 
the  direct  intention  of  weakening  the  power  of 
organized  labor. 

"It  is  not  right  that  a  man  should  go  without 
the  full  pay  he  might  receive  unless  he  stays  with 
one  company. 

"The  cause  of  unrest  is  not  the  monotony  of 
modern  industrial  employment,  but  the  helpless- 
ness of  the  men  in  having  no  say  as  to  how  they 

*  Organized  Labor,  however,  has  shown  no  such  aversion  to 
governmental  pensions.    Again,  to  quote  Mr.  Gompers: 

"Until  the  Government  itself  establishes  an  old  age  pension 
system,  labor  will  insist  that  pension  systems  shall  be  con- 
trolled by  the  workers  themselves,  without  any  cormection 
whatever  with  the  employers." 


PURPOSES  OF  PENSION  SYSTEMS         23 

shall  regulate  their  lives.  A  man  should  be  free 
to  go  from  one  firm  to  another  without  jeopar- 
dizing his  right  to  protection  in  his  old  age. 

"A  pension  scheme  with  a  right  to  withdraw 
the  'accrued  credits'  in  case  of  separation  from 
an  employer,  would  meet  many,  but  not  all,  the 
objections  to  pensions  in   general." 

While  these  statements  can  be  taken  as  rep- 
resenting the  attitude  of  Organized  Labor,  the 
question  may  fairly  be  raised  whether  in  its 
fundamental  aspects  the  psychology  of  Organized 
Labor  differs  essentially  from  that  of  Labor  in 
general.^ 

If  provision  against  superannuation  were  a 
definite  moral  obligation  of  the  employer,  it  is 
reasonably  certain  that  Labor  would  be  quick 
to  sense  it  and  to  demand  its  fulfillment. 

For  all  these  reasons,  therefore,  it  seems  clear 

*  As  a  further  indication  of  the  attitude  of  Organized  Labor 
towards  private  industrial  pension  systems,  an  experience  some 
years  ago  with  a  proposal  to  inaugurate  a  pension  plan  for 
the  organized  brewery  workers  of  the  country  may  be  cited. 
The  plan  recommended  was  of  the  contributory  type,  under 
which  employees  would  contribute  only  one-half  of  one  per 
cent  of  their  wages  and  the  employers  a  sum  equivalent  to 
one  and  a  half  per  cent.  After  careful  consideration  by  the 
officials  of  the  brewery  workers'  unions,  the  proposition  was 
submitted  to  a  referendum  vote  by  individual  unions  and 
sections  of  the  country,  a  period  of  one  month  being  allowed 
for  discussion  and  another  month  for  voting.  The  result  was 
the  rejection  of  the  plan  by  a  vote  of  22,936  to  12,888.  (E.  B. 
Phelps.  "American  Brewery-Workers'  Surprising  Rejection  of 
Their  Proffered  Workmen's  Compensation  and  Old  Age  Pen- 
sions.— A  Clean-Cut  Case  of  'The  Consciousness  of  Kind.' ") 


24         INDUSTRIAL  PENSION  SYSTEMS 

that  the  individual  employer,  while  conscious  of 
a  certain  sense  of  compunction  in  the  case  of 
workers  who  have  spent  a  lifetime  in  his  service, 
is  under  no  compelling  moral  obligation  to  pro- 
vide for  their  superannuation.  The  practical 
problem  of  dealing  with  superannuation,  how- 
ever, still  remains. 

Pensions  as  a  reward  for  long  service 
The  conception  of  pensions  as  a  reward  for 
service,  while  closely  related  to  that  just  dis- 
cussed, is  distinguished  from  it  in  many  respects: 
It  takes  no  account  of  the  necessities  of  the 
worker,  but,  ostensibly  at  least,  pensions  alike 
all,  whether  self-supporting  or  dependent,  who 
have  rendered  a  given  length  of  service  to  the  es- 
tablishment, or  who  have  fulfilled  certain  pre- 
scribed conditions.  Furthermore,  it  does  not 
necessarily  require  continuance  in  service  until 
the  employee  actually  is  superannuated.  Under 
many  plans  an  employee  who  commences  work 
at  an  early  age  may  retire  on  pension  before  he 
can  really  be  termed  old,  if  he  has  served  the  re- 
quired number  of  years. 

The  idea  of  "reward  of  service"  is  present  in 
most  modern  pension  systems.  However,  as  will 
be  shown  in  more  detail  later,  the  reward  often 
is  subject  to  many  conditions. 


PURPOSES  OF  PENSION  SYSTEMS         25 

As  a  straight  reward  of  service  most  pension 
systems  are  grossly  inadequate.  The  percentage 
of  workers  who  go  on  the  pension  roll  usually 
is  only  a  small  fraction  of  the  total  force,  or  even 
of  those  remaining  with  a  company  for  long 
periods.  Oftentimes  it  is  almost  negligible. 
Moreover,  such  systems  easily  become  highly  in- 
equitable as  between  individual  workers.  An 
employee  who  happens  to  have  completed,  say, 
twenty  or  twenty-five  years  of  service  may  get 
a  pension,  the  "present  value"  of  which  may  be 
thousands  of  dollars,  while  another  worker,  per- 
haps more  efi5cient  and  more  faithful,  but  who 
has  just  failed  of  completing  the  required  period 
of  service,  may  get  absolutely  nothing.  If  long 
service  is  entitled  to  a  reward,  then  it  would  seem 
that  a  system  which  pays  a  large  benefit  for,  say, 
twenty  years'  service,  but  pays  nothing  for  nine- 
teen years'  service,  is  inherently  defective. 

A  further  objection  often  advanced  against  the 
"reward-of-service"  idea,  as  actually  operative  in 
many  pension  plans,  is  that  it  may  put  a  pre- 
mium on  inefficiency  by  keeping  men  in  service, 
the  retirement  of  whom  should  be  the  primary 
purpose  of  a  pension  system.  For  example,  a 
humane  executive  may  be  tempted  to  retain  on 
his  force  a  worker  who  needs  only  one  or  two 
more  years  of  service  to  entitle  him  to  a  pension. 


26         INDUSTRIAL  PENSION  SYSTEMS 

even  though  that  worker  has  become  distinctly 
inefl&cient.  Paradoxical  as  it  may  be,  a  pension 
system  may  thus  defeat  what  is  perhaps  its  most 
important  aim.  On  the  other  hand,  a  heartless 
factory  executive  may  dismiss  an  efficient  man 
approaching  the  retirement  age,  in  order  to  save 
the  company  the  cost  of  maintaining  him  later 
on  pension. 

Still  again,  it  has  happened  that  where  the  cost 
of  pensions  was  rapidly  mounting,  the  terms  of 
the  plan  itself  have  been  changed,  with  the  result 
that  many  workers  have  been  deprived  of  the 
pension  benefit  to  which  they  had  been  looking 
forward.^ 

Another  objection  of  a  somewhat  different  sort 
urged  against  the  "reward-of-service"  theory  is 
that  it  may  be  interpreted  to  mean  that  a  worker 
who  has  rendered  a  given  number  of  years  of  ser- 
vice is  entitled  to  support,  even  though  still  able 
to  work.  This  theory  has  resulted,  in  the  case  of 
some  public  service  pension  systems,  in  the  pay- 
ment of  liberal  pensions  to  men  still  in  the  prime 
of  life,  who  have  at  once  engaged  in  other  lines 
of  activity  where  their  pensions  have  given  them 
an  important  advantage  from  a  competitive 
standpoint.  It  seems  clear  that  the  expenditure 
of  public  funds  to  pay  pensions  to  men  still  far 

'  In  this  connection,  see  p.  169. 


PURPOSES  OF  PENSION  SYSTEMS         27 

from  the  point  of  superannuation,  and  who  are 
still  able  to  work,  is  wholly  indefensible.  In 
private  industry  the  practice  would  likewise  be 
objectionable.  As  a  practical  matter,  in  most 
private  industrial  pension  systems  the  service  re- 
quirement is  so  linked  up  with  a  stipulated  age 
that  a  worker  would  seldom  be  able  to  secure  a 
pension  while  still  in  middle  life.  Some  private 
systems,  however,  permit  retirement  after  long 
service,  irrespective  of  age. 

The  idea  has  sometimes  been  advanced  that  a 
pension  system  is  intended  to  assure  the  worker 
a  period  of  comfortable  ease  in  his  declining 
years.  This  conception  of  a  pension  system  has 
been  vigorously  condemned  by  one  writer  as 
follows : 

"Employees  must  be  on  their  guard  against 
those  of  their  leaders  who  adopt  the  view  that  the 
purpose  of  a  retirement  system  is  to  reward 
faithful  servants  with  a  'chance  to  rest,'  and  that 
the  conditions  established  .  .  .  should  be 
placed  sufficiently  low  so  that  'we  may  get  our 
pensions  while  we  are  still  young  enough  to  enjoy 
them.'  That  is  not  only  wrong  philosophy  re- 
garding the  nature  of  a  retirement  system;  it  is 
a  wrong  philosophy  regarding  life."  ^ 

The  "reward-of-service"  theory  tacitly  admits 
that  workers  rendering    unusually    long    service 

'  Lewis  Meriam.  "Principles  Governing  the  Retirement  of 
Public  Employees,"  p.  399. 


28         INDUSTRIAL  PENSION  SYSTEMS 

have  not  been  fully  paid  during  their  active  work- 
ing careers.  Under  such  a  theory  it  is  at  least 
incumbent  upon  the  employer  to  make  the  as- 
surance of  the  payment  certain;  it  would  also 
seem  that  under  this  theory  the  reward  should 
take  account  of  all  service  of  special  length  and 
not  be  dependent  upon  the  fortunate  accident 
that  the  worker  shall  complete  a  service  period 
of  extraordinary  length. 

If  the  "reward-of-service"  theory  be  accepted 
as  a  primary  reason  for  establishing  a  retirement 
system,  there  appears  to  be  a  far  better  method  of 
meeting  it.  This  matter  is  discussed  in  detail 
in  Chapter  V.  Certainly  this  object  is  not  ade- 
quately met  by  the  ordinary  non-contributory^ 
pension  system. 

Pensions  as  a  means  of  increasing  efficiency 
We  come  now  to  the  third  conception  of  pen- 
sion systems  specified  on  page  4,  namely,  their 
use  as  a  means  of  increasing  efficiency,  either  by 
humanely  getting  rid  of  workers  who  have  be- 
come superannuated,  or  by  stimulating  the  inter- 
est and  effort  of  the  active  force. 

This  is  one  of  the  primary  motives  which  have 
led  to  the  establishment  of  pension  systems.  A 
pension  system,  it  is  urged,  tends  to  relieve  the 

'  See  p.  47. 


PURPOSES  OF  PENSION  SYSTEMS        29 

employer  of  any  compunction  which  he  may  feel 
over  the  dismissal  of  a  worker  grown  old  in  his 
service  and  now  without  means,  and  thus  more 
readily  enables  him  to  increase  the  eflQciency  of 
his  working  force  by  weeding  out  those  no  longer 
able  to  perform  their  allotted  tasks.  The  "drag" 
of  such  workers  upon  production  is  well  known 
to  all  industrial  executives.  It  is  extremely 
wasteful  to  permit  a  superannuated  worker  to 
continue  at  a  task  where  his  inefficiency  means 
a  lower  output  not  only  for  himself,  but  for  all 
others  associated  with  him  in  the  operation.  In 
some  cases,  notably  in  work  of  a  "line"  character, 
it  is  imperative  that  such  a  worker  shall  not  be 
retained,  at  least  in  the  particular  position. 
Many  establishments  have  endeavored  to  meet 
this  difficulty  by  finding  other  tasks  of  a  lighter 
or  less  exacting  character,  to  which  such  older 
workers  are  assigned.  But  the  opportunities  of 
this  sort  often  are  far  too  few  to  take  care  of 
the  increasing  number  of  superannuated  work- 
ers. The  employer  has,  therefore,  resorted  to  the 
expedient  of  a  pension  system  in  order  to  enable 
him  to  dismiss  such  workers  without  raising  any 
question  of  injustice  or  of  adverse  reaction  on  the 
other  employees. 

This  broad  underlying  phase  of  the  pension 
movement  is  suggested  by  the  following    state- 


30         INDUSTRIAL  PENSION  SYSTEMS 

merit  from  the  Massachusetts  Commission  on  Old 
Age  Pensions,  Annuities,  and  Insurance.^ 

"The  problem  of  dealing  with  the  aged  em- 
ployee is  an  urgent  one  in  the  modern  business 
world.  ...  To  carry  them  on  the  payroll  at 
their  regular  employment  means  waste  and  disor- 
ganization of  the  working  force;  to  turn  them 
adrift  is  not  humane.  In  the  past,  large  employ- 
ers of  labor  have  tried  to  meet  this  difficulty  in 
piecemeal  fashion  by  retiring  aged  employees  on 
pension  in  certain  cases,  or  giving  them  light 
work,  each  case  being  provided  for  separately,  on 
its  own  merits;  now  they  are  beginning  to  deal 
with  the  problem  in  a  systematic  fashion,  by 
adopting  a  uniform  method  of  retirement  with 
pension." 

Of  all  the  purposes  which  have  led  to  the  es- 
tablishment of  industrial  pension  systems  this  is, 
perhaps,  most  easily  justified.  In  the  case  of  the 
public  service,  it  is  the  one  paramount  justifica- 
tion for  inaugurating  a  pension  system.  As  one 
writer  has  said: 

"Every  reason  for  establishing  a  retirement 
system  thus  far  advanced  can  be  summarized  un- 
der the  single  broad  heading  of  the  improvement 
of  the  public  service  and,  in  fact,  that  is  the  only 

*  Report  of  the  Massachusetts  Commission  on  Old  Age  Pen- 
sions, Annuities,  and  Insurance,  1910,  pp.  136-137. 

It  should  be  noted  that  two  state  commissions  in  Massa- 
chusetts have  investigated  the  pension  problem.  The  second 
was  known  as  the  Massachusetts  Commission  on  Pensions,  and 
its  report  was  issued  in  1914. 


PURPOSES  OF  PENSION  SYSTEMS        31 

reason  why  the  Government  should  establish  one 
in  its  own  interests."  ^ 

Without  a  retirement  system,  it  is  urged,  the 
public  official  is  tempted  to  continue  workers 
who  in  private  establishments  would  be  dis- 
missed. A  special  reason  for  this  is  that  ordi- 
narily a  government  executive  is  under  no  such 
pressure  to  "show  results"  as  is  the  manager  of 
an  industrial  plant.  It  is,  indeed,  notorious  that 
the  government  service  includes  many  who  are 
incapacitated  and  superannuated,  and  whose  sal- 
aries are  in  reality  little  more  than  pensions, 
while,  in  addition,  the  Government  is  incurring  a 
heavy  overhead  expense  on  their  account. 

Yet,  as  a  matter  of  fact,  there  is  grave  danger 
that  certain  types  of  pension  systems  may  not 
result  in  thus  increasing  efficiency  through  the 
removal  of  the  superannuated.  A  report  of  the 
United  States  Commission  on  Economy  and  Ef- 
ficiency, submitted  to  the  President  of  the  United 
States  in  1910,  indeed,  maintained  that  a  non- 
contributory  "  pension  system  in  the  case  of  gov- 
ernment service  operated  to  retain  poor  em- 
ployees rather  than  to  keep  up  the  standard  of 
-efficiency.     It  argued    that    "in    case    the    inef- 

*  Lewis  Meriam.     "Principles  Governing  the  Retirement  of 
Public  Employees,"  p.  16. 
^'See  p.  47. 


32         INDUSTRIAL  PENSION  SYSTEMS 

ficient  employee  is  working  under  a  pension  sys- 
tem whereby  he  is  entitled,  on  reaching  a  certain 
age,  to  retire  on  a  competence,  the  head  of  the 
office  will  be  all  the  more  reluctant  to  dismiss 
him  before  he  reaches  that  age." 

The  Commission  held  that  a  pension  system 
"has  exactly  the  opposite  effect  where  the  private 
corporation  is  the  employer,"  since  the  adminis- 
trative head  of  the  office  is  in  self-defense 
"obliged  to  hold  up  every  subordinate  to  the  high- 
est standard  of  efficiency  and  to  stifle  any  feel- 
ing of  humanity  or  sympathy  which  might  other- 
wise tempt  him  to  show  leniency." 

Without  attempting  to  analyze  this  point  in 
detail,  it  may  be  concluded  as  almost  axiomatic 
that  a  private  employer  will  have  less  compunc- 
tion about  dismissing  superannuated  workers  if 
he  knows  that  their  remaining  years  are  provided 
for  by  some  retirement  system  than  he  will  have  if 
he  knows  that  they  are  likely  to  become  objects  of 
charity.  The  failure  of  many  pension  systems  to 
accomplish  the  removal  of  superannuated  workers 
effectively  often  is  due  to  the  fact  that  the  system 
is  of  a  defective  type  or  contains  defective  pro- 
visions, or  to  faulty  administration,  rather  than 
to  an  inherent  vice  in  the  principle  of  the  retire- 
ment benefit  itself. 

It  may  be  concluded,  therefore,  that  the  prob- 


PURPOSES  OF  PENSION  SYSTEMS         33 

lem  of  maintaining  efficiency  by  the  removal  of 
workers  no  longer  able  to  perform  their  tasks 
should  be  facilitated  by  the  inauguration  of  a 
proper  retirement  system.  As  noted  later,  this 
alone  may  not  be  a  sufficient  justification  for  such 
a  system. 

Pensions  as  a  means  of  increasing  efficiency  of 
the  active  force.  In  distinction  from  increasing 
efficiency  through  elimination  of  the  superannu- 
ated, it  is  often  claimed  that  pension  systems 
increase  the  efficiency  of  the  active  force.  As  al- 
ready pointed  out,  the  very  fact  that  superan- 
nuated workers  are  thus  provided  for  may  exert 
a  favorable  influence  upon  the  active  members  of 
the  force  and  increase  their  good  will,  and  thus 
perhaps  their  efficiency  as  well.  Again,  to  the 
extent  that  a  pension  system  relieves  the  worker 
during  the  stress  period  of  life  of  anxiety  over 
his  declining  years,  he  is,  it  is  urged,  in  better 
condition,  mentally  and  physically,  to  perform 
his  daily  tasks. 

The  same  view  is  found  in  the  following  state- 
ment in  the  Report  of  the  Massachusetts  Com- 
mission for  1910: 

"The  economic  gain  from  the  pension  system 
is  twofold:  it  eliminates  the  waste  and  demorali- 
zation attendant  upon  the  continued  employment 
of  old  men  who  have  outlived  their  usefulness; 


34         INDUSTRIAL  PENSION  SYSTEMS 

and  it  helps  to  promote  industry,  contentment, 
and  loyalty  on  the  part  of  the  working  force. 
The  pension  system  aids  in  solving  the  difl&cult 
problem  of  stimulating  the  employees  of  a  large 
corporation  to  the  highest  eflSciency."  ^ 

This  argument,  while  plausible,  is  open  to  seri- 
ous question.  In  sharp  contrast  with  the  view  of 
the  first  Pension  Conamission  of  Massachusetts 
just  cited,  it  may  be  noted  that  the  second  Com- 
mission on  Pensions  of  that  state  discredited  the 
idea  that  a  pension  system  was  an  incentive  to 
eflBciency  of  the  active  working  force  and,  instead, 
concluded  as  follows: 

''The  Commission  finds  that  only  by  the  re- 
tirement of  the  superannuated  does  a  pension  sys- 
tem improve  the  efficiency  of  the  public  service."  ~ 

Replies  received  from  numerous  employers  to 
an  inquiry  on  this  point  during  the  course  of 
this  study  suggest  that  the  inauguration  of  pen- 
sion systems  was  sometimes  followed  by  an  in- 
crease in  efficiency,  but  they  by  no  means  present 
convincing  evidence  of  this  as  a  general  rule. 

A  representative  selection  of  these  views  fol- 
lows: 

"We  feel  that  our  pension  plan  is  largely  in- 
strumental in  increasing  efficiency." 

*  Massachusetts  Commission  on  Old  Age  Pensions,  Annuities, 
and  Insurance,  1910  Report,  p.  138. 
^  Not  italicized  in   original. 


PURPOSES  OF  PENSION  SYSTEMS         35 

"We  feel  that  the  pension  helps  efficiency  of 
service,  but  it  is  very  difficult  to  give  anything 
definite  in  regard  to  the  effect  of  the  pension 
only." 

"We  know  of  nothing  which  we  are  doing  which 
has  a  greater  effect  on  the  morale  of  the  organi- 
zation than  our  pension  system." 

"We  find  that  our  older  employees  consider 
their  pension  rights  in  the  nature  of  an  insur- 
ance, which,  no  doubt,  has  some  influence  in  .  .  . 
securing  their  efficiency." 

"Operating  alongside  of  our  Employees'  Sav- 
ing and  Profit  Sharing  System,  our  Employees' 
Benefit  Association,  and  more  recently,  in  con- 
junction with  our  Industrial  Council  Plan  of  em- 
ployee representation,  it  is  safe  to  say  that  the 
broad  effect  of  the  Pension  Plan  is  distinctly 
beneficial." 

"We  do  not  feel  that  we  can  expect  it  [the 
pension  system]  to  produce  any  very  noticeable 
results  in  the  way  of  .  .  .  efficiency." 

"We  do  not  believe  that  the  inauguration  of 
the  pension  fund  has  had  any  effect  on  .  .  .  ef- 
ficiency." 

That  pension  systems  do  not  materially  in- 
crease efficiency  of  the  active  force  was  the  con- 
clusion reached  by  the  Industrial  Bureau  of  the 
Merchants'  Association  of  New  York,  based  upon 
a  study  of  private  pension  systems  made  in  1919.^ 

'"Industrial    Pensions."     Merchants'    Association    of    New 
York,  1920,  p.  30. 


36         INDUSTRIAL  PENSION  SYSTEMS 

Analyzing  the  replies  of  fifty-nine  employers  with 
respect  to  the  effect  on  efficiency,  the  report  in 
question  said: 

"These  replies  show  that  the  claim  that  pension 
systems  bring  about  increased  efficiency  by  in- 
creasing appreciation  and  loyalty  of  employees 
and  by  eliminating  their  worries  is  without  much 
foundation.  Nearly  twenty  per  cent  of  the  em- 
ployers questioned  are  certain  no  increased  ef- 
ficiency results,  while  as  many  more  believe  that 
probably  such  is  the  case.  Furthermore,  very 
few  of  the  nineteen  employers  (less  than  one- 
third  of  those  replying)  who  believe  that  in- 
creased efficiency  has  resulted  appear  to  base  such 
belief  on  facts  and  some  admit  that,  while  they 
feel  sure  the  increased  efficiency  is  present,  there 
are  no  tangible  evidences  of  it. 

"This  failure  to  produce  increased  efficiency 
can  be  traced  to  the  fact  that,  in  general,  pension 
systems  appeal  only  to  employees  who  have 
grown  old  in  their  present  employment.  These 
employees  usually  constitute  a  relatively  unim- 
portant part  of  the  entire  working  force  and  their 
habits  of  efficiency,  like  all  other  habits,  have  be- 
come more  or  less  fixed," 

In  any  event,  the  effect  of  a  pension  system 
on  the  efficiency  of  the  active  force  wiU  depend 
largely  upon  the  terms  of  the  plan,  partly  upon 
its  certainty  from  the  viewpoint  of  the  employee, 
partly  upon  the  character  of  the  employee,  and 
very  largely  upon  his  age.    That  it  will  not  be 


PURPOSES  OF  PENSION  SYSTEMS         37 

an  important  factor  in  the  case  of  the  younger 
workers  is  practically  certain. 

Pensions  as  a  Means  of  Reducing  Labor  Turnover 
A  hope  that  pension  systems  will  reduce  the 
enormous  labor  turnover  so  characteristic  of  mod- 
ern industry  undoubtedly  has  been  one  chief 
reason  for  their  establishment.  Yet  on  this  point 
it  is  possible  to  say  with  assurance  that  such  sys- 
tems are  disappointing.  The  testimony  of  nearly 
all  employers  who  have  introduced  pension  sys- 
tems is  that  the  effect  upon  labor  turnover  in  the 
case  of  workers  under  middle  age  is  small,  and 
often  negligible.  For  workers  nearing  the  retire- 
ment age  the  prospect  of  a  pension  apparently  is 
a  decided  incentive  to  continuance  in  the  service. 
But  the  very  fact  that  workers  have  remained  in 
a  given  establishment  until  such  age  is  of  itself 
evidence  that  they  would  be  likely  to  continue  if 
there  were  no  pension  system.  There  is  the 
further  practical  consideration  that  the  worker 
past  middle  age  has  sufficient  inducement  to  con- 
tinue merely  because  of  the  difficulty  involved  in 
finding  a  new  position.  The  reluctance  of  Indus- 
try to  employ  men  over  fifty  years  of  age,  or 
even  somewhat  under  that  age,  is  proverbial. 

Statements  on  this  point  were  obtained  from 
a  considerable  number  of  employers.     While  at 


di  «i  ^^tl 


38         INDUSTRIAL  PENSION  SYSTEMS 

first  sight  they  appear  to  show  a  reduction  in 
labor  turnover,  careful  analysis  indicates  that  this 
was,  in  nearly  all  cases,  confined  to  older  work- 
ers. An  oflficial  of  one  large  industrial  company 
stated: 

"I  believe  that  the  restraining  influence  on 
labor  turnover  of  the  pension  system  is  practic- 
ally negligible  in  the  case  of  workers  less  than 
fifty  years  of  age." 

Other  representative  statements  on  this  point 
are  given  below: 

"We  believe  that  this  policy,  in  connection  with 
our  death  benefit  system  and  safety  and  welfare 
work  ...  is  something  of  an  incentive  in  holding 
their  loyalty." 

"As  to  the  further  results  of  the  system,  we 
feel  that  with  those  employees  who  remain  with 
the  company  for  a  number  of  years,  looking  for- 
ward to  the  possibility  of  a  pension  has  consider- 
able influence  in  reducing  the  turnover,  but  with 
more  recent  employees  it  has  very  little  of  any 
such  effect." 

"After  a  man  reaches  the  age  of  fifty  or  so  and 
has  been  with  us  for  a  considerable  time,  we  have 
no  doubt  that  the  pension  plan  tends  to  tie  him 
to  us.  The  pension  plan,  however,  has  little  in- 
fluence upon  the  real  problem  of  labor  turn- 
over." 

"The  labor  turnover  at  our  mine  operations  is 
such  that  we  have  felt  that  the  matter  of  pen- 


PURPOSES  OF  PENSION  SYSTEMS        39 

sions  is  given  very  little  consideration  by  our  men, 
except  possibly  the  employees  who  hold  the  more 
important  positions." 

"We  do  not  believe  that  group  insurance  with- 
out pension  or  endowment  features,  or  a  pension 
plan  which  does  not  provide  for  a  death  benefit 
in  some  way,  will  accomplish  very  much  in  the 
long  run,  but  we  are  convinced  by  our  experience 
that  a  plan  under  which  reasonable  death,  dis- 
ability, and  pension  benefits  are  provided,  will 
do  a  great  deal  to  increase  the  .  .  .  continuity  of 
service." 

These  statements  more  or  less  accurately  reflect 
the  general  consensus  of  opinion  on  this  subject.^ 

It  may  safely  be  asserted,  therefore,  that  the 
employer  who  inaugurates  a  pension  system  pri- 
marily for  the  purpose  of  reducing  labor  turnover 
ordinarily  will  be  disappointed.  Certainly  the 
prospect  of  such  a  result  is  not  sufficient  warrant 
for  assuming  the  burden  and  expense  of  a  pension 
system. 

Furthermore,  some  disinterested  students  of 
the  labor  problem  hold  that  a  considerable  labor 

*The  Report  of  the  Industrial  Bureau  of  the  Merchants' 
Association  of  New  York,  previously  cited,  said  on  this  point: 

"As  might  be  expected  from  the  fact  that  pension  systems 
do  not  in  general  create  appreciation,  loyalty,  and  efficiency, 
neither  do  they  develop  materially  permanence  of  employment 
except  with  the  older  employees.  In  this  connection  it  occurs 
to  one  that  labor  turnover  is  ordinarily  very  small  among 
middle-aged  employees  who  have  worked  for  a  number  of 
years  for  their  present  employer." 


40         INDUSTRIAL  PENSION  SYSTEMS 

turnover  is  by  no  means  undesirable,  but  even 
that  it  is  essential  in  order  to  enable  workers  to 
find  their  proper  niche  in  industry.  The  use  of 
pension  systems  to  interfere  with  the  mobility 
of  labor  has  often  been  condemned  as  an  attempt 
to  "chain  the  worker  to  his  job." 

Organized  Labor  has  repeatedly  objected  to 
private  pension  systems  on  this  ground,  and  on 
the  further  ground  that  they  have  been  insti- 
tuted in  order  to  prevent  or  hinder  unionization. 
Thus  Samuel  Gompers,  in  a  statement  secured 
during  the  course  of  this  study,  said: 

"Labor  does  not  believe  in  pensions  given  by 
the  employer.  Old  age  pensions  were  established 
by  a  number  of  railroad  companies,  not  for  the 
benefit  of  their  employees  primarily,  but  for  the 
influence  they  might  have  on  discouraging  or- 
ganization. .  .  . 

"Where  an  employer  establishes  a  pension  sys- 
tem, it  can  be  traced  to  the  hope  that  it  will 
prevent  the  organization  of  the  employees  into 
trade  unions.  There  is  no  case  on  record  where 
the  employees  are  union  men  that  pensions  are 
paid.  It  is  only  in  non-union  plants  or  indus- 
tries that  the  pension  system  can  be  found.  .  .  . 

"Another  idea  behind  the  payment  of  pensions 
is  to  prevent  the  enormous  turnover  in  non-union 
shops  where  the  wages  and  working  conditions 
are  undesirable.  The  employers  believe  that  the 
hope  of  receiving  a  pension  some  time  in  the  dis- 


PURPOSES  OF  PENSION  SYSTEMS        41 

tant  future  will  influence  the  workers  to  accept 
low  wages  and  disagreeable  conditions  of  em- 
ployment.    .    .     . 

"Only  the  autocrats  in  industry,  the  employers 
who  fix  the  wages,  hours  of  employment,  and 
working  conditions  of  the  workers,  believe  in 
profit  sharing  as  well  as  pensions.  Until  the 
Government  itself  establishes  an  old  age  pension 
system,  labor  will  insist  that  pension  systems 
shall  be  controlled  by  the  workers  themselves 
without  any  connection  whatever  with  the  em- 
ployers. .  .  .  No  system  should  be  devised  that 
will  tie  men  to  their  jobs,  and  the  object  of  the 
pensions  when  established  in  non-union  shops  is 
to  compel  them  to  accept  whatever  wages  and 
conditions  of  employment  are  forced  upon 
them.  .  .  . 

"Labor  therefore  refuses  to  place  in  the  hands 
of  employers  a  weapon  that  can  take  away  from 
workers  at  the  last  moment  any  benefit  that  de- 
pends upon  their  servility." 

While  exception  could  easily  be  taken  to  many 
of  the  contentions  in  this  statement,  it  may  be 
regarded  as  an  illustration  of  the  position  of  a 
large  section  of  Organized  Labor  towards  private 
pension  systems. 

Pensions  as  a  Means  of  Disciplinary  Control 
In  many  cases,    one    motive    in    establishing 
pension  systems  has  been  a  desire  to  control  and 
discipline  workers.    This  is  particularly  true  with 


42         INDUSTRIAL  PENSION  SYSTEMS 

respect  to  strikes.  Many  employers  have  argued 
that  an  employee  who  may  lose  his  pension  if  he 
goes  on  strike,  joins  a  union,  or  engages  in  other 
activities  displeasing  to  the  management,  wiU 
carefully  count  the  cost. 

This  purpose  of  pensions  has  been  stated  by 
one  writer  as  follows: 

"The  pension  attaches  the  employees  to  the 
service  and  thus  decreases  the  liability  to 
strike.  .  .  . 

"When  employees  realize  that  unsatisfactory 
conduct  may  at  any  time  lose  them  not  only  their 
present  position,  a  loss  which  in  such  a  labor 
market  as  ours  might  be  easily  made  good,  but 
that  it  entails  further  the  loss  of  a  very  valuable 
asset — the  employee's  right  to  a  pension — the  in- 
centive to  good  conduct  is  greatly  increased."  ^ 

This  view  is  clearly  reflected  in  some  of  the 
pension  plans  now  in  actual  operation.  For  in- 
stance, such  provisions  as  the  following  are  not 
uncommon  in  "discretionary"  plans: 

"A  pension  may  be  withheld  or  terminated  in 
case  of  misconduct  on  the  part  of  the  beneficiary 
or  for  other  cause  sufficient  in  the  judgment  of 
the  Board  to  warrant  such  action." 

"Discontinuance  of  regular  work  without  per- 
mission for  any  other  reason  than  sickness  or  ac- 

*  F.    A.   Vanderlip.     "Insurance    for   Workingmen."     North 
American  Review,  December,  1915. 


PURPOSES  OF  PENSION  SYSTEMS        43 

cident,  may  at  the  discretion  of  the  Committee  be 
deemed  sufficient  cause  for  the  forfeiture  of  all 
benefits  accruing  under  this  plan." 

Here,  again,  practical  experience  indicates  that 
any  such  expectations  from  a  pension  system  are 
doomed  to  disappointment.  Strikes  have  fre- 
quently occurred  in  establishments  where  pension 
systems  are  in  force.  The  experience  of  railroad 
companies,  several  of  which  have  long-established 
pension  systems,  is  an  illuminating  example  of 
their  ineffectiveness  in  avoiding  labor  troubles. 

Even  if  a  pension  system  succeeds  in  prevent- 
ing men  from  going  on  strike,  the  fact  that  they 
have  been  deterred  from  doing  so  under  virtual 
compulsion  may  engender  an  amount  of  ill  feel- 
ing which  will  more  than  nullify  any  beneficial 
effects  of  the  system. 

The  use  of  a  pension  system  for  disciplinary 
purposes  is,  indeed,  essentially  its  use  as  a  club. 
The  pension  promise  is  in  effect  distorted  into  a 
threat.  If  one  purpose  of  a  pension  system  is  to 
increase  good  will — and  it  is  difficult  to  see  how 
this  purpose  can  be  absent — certainly  this  result 
cannot  be  hoped  for  where  the  system  is  per- 
verted into  an  engine  of  repression,  oppression, 
or  discipline. 

Much  of  the  hostility  on  the  part  of  Labor 
toward  private  industrial  pension  systems  appar- 


44         INDUSTRIAL  PENSION  SYSTEMS 

ently  can  be  traced  to  the  belief,  or  fear,  that  they 
are  likely  to  be  used  for  such  disciplinary  pur- 
poses. 

Squier,  in  his  book  already  quoted/  says  on 
this  point: 

''That  which  the  more  thoughtful  of  the  wage- 
earners  themselves  urge  against  a  pension  plan 
is  that  it  restricts,  even  to  the  point  of  preven- 
tion, the  mobility  of  labor.  .  .  . 

"Another  objection  more  frequently  urged  by 
the  laboring  class  against  this  system  is  that  the 
employee  becomes  a  sort  of  chattel  property  of 
the  employer.  The  latter  is  free  to  discharge 
him,  cut  down  his  wages,  or  to  shift  him  from 
an  agreeable  to  an  undesirable  line  of  work.  He 
must  submit  without  resistance." 

One  prominent  writer  who  has  criticized  the 
use  of  pension  systems  for  disciplinary  purposes, 
has  characterized  "discretionary"  systems  ^  as  "the 
new  peonage."    In  this  connection  he  said: 

"A  pension  system  with  such  features  must 
either  prove  a  delusive  protection  or  operate  as 
a  bribe  to  induce  the  wage-earner  to  submit  to 
a  new  form  of  subjection  to  the  corporation.  .  .  . 

"Employers  seek  to  justify  provisions  in  the 
pension  systems  like  those  quoted  above  by  the 
fact  that  the  pension  fund  is  contributed  wholly 

*  "Old  Age  Dependency  in  the  United  States,"  pp.  278-280. 
"  See  p.  47. 


PURPOSES  OF  PENSION  SYSTEMS        45 

by  the  employer.  But  this  fact  furnishes  no  jus- 
tification. The  employer  should  not  be  per- 
mitted, even  at  his  own  expense,  to  establish  a 
pension  system  which  tends  to  rob  the  working- 
man  of  his  little  remaining  industrial  liberty."  ^ 

Conclusions  as  to  Proper  Purposes  of  a  Pension 
—- —  ■  System 

To  epitomize  the  preceding  discussion  it  may 
be  concluded  that  a  private  employer  is  under 
no  compelling  moral  obligation  to  provide  for  the 
support  of  his  superannuated  employees  in  their 
old  age.  Nor  can  a  pension  system  primarily  be 
regarded  as  a  method  of  rewarding  faithful  ser- 
vice, although  this  purpose  may  be  present.  It 
may  further  be  concluded  that  the  prospect  of 
reducing  labor  turnover,  or  of  exercising  disci- 
plinary control  over  workers,  does  not  promise 
results  of  sufficient  importance  to  warrant  the  ex- 
pense of  a  pension  system,  while  the  latter  pur- 
pose is  in  many  respects  inherently  objectionable. 

It  follows,  therefore,  that  the  one  controlling 
justification  of  a  pension  system  from  the  em- 
ployer's standpoint  is  that  it  will  increase  ef- 
ficiency, primarily  through  elimination  of  super- 
annuated and  incapacitated  workers,  and  possi- 
bly by  building  up  a  larger  amount  of  good  will 
and  interest  among  the  active  force.    Although 

^  Louis  D.  Brandeis.    "Business  a  Profession,"  pp.  75-76. 


46         INDUSTRIAL  PENSION  SYSTEMS 

some  of  the  other  purposes  discussed  are  im- 
portant, they  are  incidental  to  the  primary  ob- 
ject of  increasing  efficiency. 

While  in  many  cases  it  is  doubtful  whether  such 
efficiency  is  attained,  this  failure  may  be  due  to 
imperfections  in  the  plan  or  to  errors  in  admin- 
istration. A  sound  retirement  system  should  fa- 
cilitate the  problem  of  dismissing  superannuated 
and  dependent  workers.  There  may  also  be  some 
increase  in  the  efficiency  of  the  active  force,  but 
the  evidence  on  this  point  is  by  no  means  con- 
vincing. 

To  the  extent  that  a  pension  system  does  ac- 
tually increase  efficiency,  it  merits  most  careful 
consideration. 

Increase  in  efficiency,  however,  is  not  in  itself 
a  complete  justification  of  a  pension  system.  Not 
only  must  a  pension  system  be  effective,  but  it 
must  be  inherently  sound  and  equitable,  and  must 
not  produce  consequences  injurious  to  the  worker 
or  to  society  as  a  whole.  In  order  to  determine 
the  facts  on  these  important  points,  it  is  essential 
to  take  up  the  discussion  by  distmctive  types  of 
pension  systems. 

Types  of  Pension  Systems 

Before  proceeding  to  this  analysis  it  will  be 
convenient  to  define  briefly  the  principal  types 


PURPOSES  OF  PENSION  SYSTEMS        47 

of  private  pension  systems.    These  are  three  in 
number,  as  follows: 

1.  The  non-contributory  "discretionary"  sys- 
tem; 

2.  The  non-contributory  "limited-contractual" 
system ;  ^ 

3.  The  contributory  system. 

In  pension  systems  of  the  first  type  the  cost 
is,  at  least  ostensibly,-  borne  by  the  employer, 
the  employee  making  no  direct  contribution. 
The  employer,  moreover,  has  complete  discretion, 
not  only  as  to  the  general  provisions  of  the  plan 
and  the  amount  of  the  benefit,  but  also  as  to  the 
continuance  of  the  system,  or  even  the  continu- 
ance of  a  pension  which  has  once  been  entered 
upon.  Such  "discretionary"  systems  specifically 
deny  the  existence  of  any  contractual  right  on 
the  worker's  part  and,  as  a  result,  provide  for 
no  benefit  to  a  worker  quitting  the  service  or 
dismissed  before  reaching  the  retirement  age. 
They  may,  or  may  not,  include  a  death  bene- 
fit. 

In  pensions  of  the  second  type  the  contribu- 
tions are  likewise  made  exclusively  by  the  em- 
ployer who,  again,  retains  practically  complete 
discretion  except  that,  once  a  pension  has  been 

*This   designation    is   not   in   common   use,   but   has   been 
adopted  as  a  convenient  one  for  the  purpose  of  this  report. 
'See  p.  53. 


48         INDUSTRIAL  PENSION  SYSTEMS 

entered  upon,  the  employee  acquires,  to  some  ex- 
tent at  least,  a  vested  right  in  its  continuance. 
However,  while  recognizing  a  right  to  the  pension 
itself,  systems  of  this  type  do  not  recognize  a 
right  to  a  withdrawal  equity  by  workers  separated 
from  the  service  before  reaching  the  retirement 
age.  Even  the  right  to  the  pension  often  is  lim- 
ited.i 

In  contributory  systems  the  cost  is  divided  be- 
tween the  employer  and  the  employee,  either 
equally,  or  on  some  other  basis.  A  more  im- 
portant matter  is  that  ordinarily  the  employee 
acquires  a  definite  right  to  the  pension,^  and  he 
also  ordinarily  has  a  right  to  the  return  of  his 
own  contributions  (either  with,  or  without,  in- 
terest) in  case  of  his  death  or  separation  from 
the  service  prior  to  the  retirement  age.  Such 
systems  usually  provide  a  death  benefit. 

A  contributory  system  really  includes  two  ele- 
ments: one,  the  contribution  of  the  employee, 
which  represents  savings  against  old  age;  the 
other,  the  contribution  of  the  employer,  which 
is  in  the  nature  of  a  pension  proper. 

^Thus,  payment  is  sometimes  limited  by  the  adequacy  of 
an  amount  set  aside  as  a  pension  fund,  and  usually  the  bene- 
ficiary does  not  have  a  legal  claim  as  against  the  employer. 

^  Some  contributory  systems  contain  "discretionarj'^"  pro- 
visions. The  right  to  abandon  the  plan  on  return  of  the 
employees'  contribution  usually  is  reserved. 


PURPOSES  OF  PENSION  SYSTEMS         49 

Contributory  pension  systems,  while  common 
in  the  public  service,  and  fairly  frequent  among 
banking  institutions,  are  very  seldom  used  by  in- 
dustrial establishments. 


CHAPTER  II 

non-contributory    pension    systems    of    the 
"discretionary"  type 

The  great  majority  of  private  industrial  pen- 
sion systems  now  in  operation  are  of  the  non- 
contributory  "discretionary"  type:  that  is,  no 
part  of  the  cost  is  borne  by  direct  contribution 
from  the  employee,  while  the  employer  has  com- 
plete discretion,  both  with  respect  to  the  general 
features  of  the  plan,  and  as  to  the  granting,  or 
even  the  continuance,  of  the  pension  in  specific 
instances.  Such  systems  flatly  deny  the  existence 
of  a  contractual  right. 

This  type  of  pension  system  is  based,  whether 
consciously  or  unconsciously,  on  the  assumption 
that  a  pension  is  a  gratuity  and,  as  such,  may 
properly  be  awarded  by  the  employer  at  his  will. 
Most  discretionary  plans,  in  fact,  state  that  the 
payments  are  gratuitous  gifts.  Clauses  like  the 
following  are  common: 

"The  allowances  are  voluntary  gifts  from  the 
company  and  constitute  no  contract  and  confer 
no  legal  rights  upon  any  employee.  The  con- 
tinuance of  the  retirement  allowance  depends 
upon  the  earnings  of  the  company  and  the  allow- 

50 


"DISCRETIONARY"  TYPE  51 

ances  may  at  any  time  be  reduced,  suspended,  or 
discontinued  on  that,  or  any  other  account,  at 
the  option  of  the  Board  of  Directors."  ^ 

"This  plan  was  adopted  by  the  Company,  to 
reward  long  and  faithful  service.  It  is  a  purely 
voluntary  provision  made  by  the  Company  for 
the  benefit  of  its  employees,  and  constitutes  no 
contract,  and  confers  no  right  of  action."  ^ 

"Neither  the  creation  of  this  Fund  nor  any  pro- 
vision or  action  in  reference  or  relating  thereto 
or  the  distribution  or  application  thereof  or  any 
thing  done  under  or  because  of  or  in  relation 
to  such  Fund,  shall  be  construed  as  constituting 
or  effecting  a  contract,  expressed  or  implied,  or 
giving  any  employee,  beneficiary,  or  other  per- 
son, any  legal  rights,  or  right  of  action  at  law  or 
in  equity,  either  before  or  after  pension  granted, 
nor  giving  any  employee  the  right  to  be  retained 
in  the  service,  and  all  employees  remain  subject 
to  discharge  to  the  same  extent  as  if  this  Fund 
had  not  been  created,  the  creation  of  such  Fund 
and  all  provisions  made  in  reference  or  relating 
thereto,  being  purely  voluntary  on  the  part  of  the 
Company  for  the  benefit  of  employees  who  shall 
have  rendered  it  long  and  faithful  service."  ^ 

It  is  imperative  at  the  outset  to  determine 
whether  this  conception  of  non-contributory  pen- 
sions as  voluntary  gifts  is  sound. 

*  From  plan  of  the  Newport  News  Shipbuilding  Corpora- 
tion. 

'  From  Pension  and  Relief  Plan  of  the  Standard  Oil  Com- 
pany of  Kentucky. 

'  From  Pension  Board  Regulations  of  the  Pension  and 
Relief  Fund  of  Otis  Elevator  Company. 


52         INDUSTRIAL  PENSION  SYSTEMS 

Are  Non-Contributory  Pensions  Gratuities? 

Originally,  pensions  were  mere  gratuities. 
Thus,  to  quote  from  one  writer: 

"The  history  of  the  pension  as  a  reward  for 
public  service  goes  back  to  the  Roman  Empire. 
At  that  period  and  for  many  centuries  thereafter 
the  pension  existed  as  the  gift  of  a  sovereign  to 
a  subject  for  distinguished  military  service.  As 
time  went  on  the  sovereign  used  his  prerogative 
to  reward  distinguished  achievement  in  other 
fields  of  endeavor,  in  literature,  in  art,  in  philan- 
thropy, but  the  pension  always  remained  the  free 
gift  of  a  sovereign  or  of  a  government  to  an  in- 
dividual." 1 

"The  word  pension  in  the  exact  sense  applies 
to  a  payment  made  to  an  individual,  without  his 
cooperation."  ^ 

In  a  strict  sense  a  pension  per  se  is  primarily 
a  gratuity.  Distinction  should,  however,  be  made 
between  pensions  as  voluntary  or  arbitrary  pay- 
ments by  an  employer  as  a  charity,  and  pensions 
paid  under  definite  systems,  where  the  prospect 
of  a  benefit  is  formally  held  before  the  worker 
as  an  inducement  to,  or  reward  for,  continued 
service.    As  stated  in  the  article  just  quoted: 

^  Carnegie  Foundation  for  the  Advancement  of  Teaching, 
Bulletin  No.  9.  "A  Comprehensive  Plan  of  Insurance  and 
Annuities  for  College  Teachers,"  p.  6. 

'Ibid.,  p.  5. 


"DISCRETIONARY"  TYPE  53 

"The  personal  pension  is  an  ancient  institu- 
tion.   The  pension  system  is  distinctly  modern." 

Pensions  provided  under  formal  systems,  in- 
stead of  being  mere  gratuities  on  the  part  of  the 
employer,  actually  may  come  to  a  large  extent 
out  of  the  worker's  own  wage.  Many,  if  not 
most,  students  of  the  pension  problem  hold  that 
non-contributory  pensions  are  essentially  "de- 
ferred pay"  and  that,  as  such,  they  have  a  ten- 
dency to  reduce  the  current  rate  of  wages.  In 
fact,  some  writers  hold  that  there  is  no  such  thing 
as  a  "free"  pension,  but  that  in  the  long  run  the 
cost  of  non-contributory  pension  systems  is  borne 
by  the  worker  himself. 

This  issue  is  a  vital  one.  If  a  pension  is  a  mere 
gift  dispensed  by  the  employer  as  a  charity,  then 
the  latter  may  be  considered  free  to  do  as  he 
pleases,  just  as  in  the  case  of  any  other  charity. 
If,  however,  a  pension  is  essentially  a  part  of,  or 
inevitably  involved  in,  the  wage  payment,  and 
merely  deferred  until  a  distant  date,  the  situa- 
tion obviously  is  quite  different  and  the  worker 
as  obviously  has  rights  which  cannot  justly  be 
ignored. 

Non-Contributory  Systems  as  Deferred  Pay 

The  contention  that  non-contributory  systems 
are  essentially    deferred  pay  and,   furthermore, 


54         INDUSTRIAL  PENSION  SYSTEMS 

that  they  tend  to  reduce  the  rate  of  wages,  is  well 
brought  out  in  the  following  statements  selected 
from  leading  discussions  of  the  pension  problem. 
Illinois  Pension  Laws  Commission:^ 

"Whether  the  contribution  to  a  pension  fund 
be  taken  wholly  from  the  employee's  wages  or 
salary,  or  be  paid  wholly  by  the  employer,  or  be 
derived  in  part  from  each,  these  contributions 
are  in  all  three  cases  to  be  regarded  as  in  reality 
a  deduction  from  wages  or  salary.  It  is  the  opin- 
ion of  students  of  the  pension  problem  that  the 
existence  of  a  pension  system  in  connection  with 
any  position  of  employment  is  taken  into  account 
by  both  parties  to  the  contract  of  employment, 
and  that,  broadly  speaking,  wages  and  salaries 
actually  paid  are  in  due  course  reduced  below 
what  they  otherwise  would  be  by  the  amount 
of  the  total  contributions  from  both  the  employer 
and  employee  to  a  pension  fund.  The  employee 
will  thus  pay  for  his  pension  by  deductions  from 
his  wages  or  salary,  whether  he  is  conscious  of 
it  or  not." 

The  commission,  indeed,  went  so  far  as  to 
say  that:  "It  is  quite  possible  that,  with  a  sound 
fund  in  existence,  the  reduction  in  wages  and 
salaries  may  in  time  materially  exceed  the  amount 
of  the  total  contributions,  owing  to  the  advan- 
tages of  such  a  fund  to  the  emplo3^ee  under  pres- 
ent   economic    conditions.      This    consideration 

*  Report  of  Illinois  Pension  Laws  Commission,  1916,  p.  282. 


"DISCRETIONARY"  TYPE  55 

further  emphasizes  the  advantage  to  the  em- 
ployer of  having  such  a  fund  established." 

The  Massachusetts  Commission  on  Pensions 
accepted  the  deferred  pay  principle,  holding  that 
"non-contributory  pensions  inevitably  come  to  be 
considered  as  deferred  pay,  and  tend  to  result  in 
holding  down  rates  of  remuneration."  ^  A  similar 
position  was  taken  by  the  Pennsylvania  Commis- 
sion on  Old  Age  Pensions,^  by  the  Wisconsin 
Pension  Laws  Commission,  by  the  United  States 
Commission  on  Economy  and  Efficiency,^  and  by 
various  other  official  commissions  appointed  to 
study  the  pension  problem. 

The  theory  of  pensions  as  deferred  pay  has 
been  very  generally  accepted  by  writers  on  the 
subject.    Thus,  one  critic  has  said: 

"The  real  incidence  of  the  cost  of  a  retirement 
system  in  the  case  of  employees  who  enter  the 
service  after  the  establishment  of  the  system  is 
placed  by  economic  forces  on  the  employee.  The 
benefits  offered  by  the  system  become  part  of  his 
compensation  for  the  services  rendered."  * 

^  Massachusetts  Commission  on  Pensions,  1914  Report,  p. 
12.     (See  footnote,  p.  30.) 

'Report  of  the  Pennsylvania  Commission  on  Old  Age  Pen- 
sions, March,  1919,  pp.  114-115. 

*  Report  of  the  Commission  on  Economy  and  Efficiency 
Relative  to  Retirement  from  the  Classified  Civil  Service  of 
Superannuated  Flmploycps,  pp.  1719. 

"Lewis  Meriam.  "Principles  Governing  the  Retirement  of 
Public  Employees,"  p.  388. 


56         INDUSTRIAL  PENSION  SYSTEMS 
W.  E.  H.  Lecky: 

"All  experience  shows  that  where  a  pension  is 
attached  to  a  particular  employment,  the  rate  of 
wages  in  it  is  greatly  below  what  would  other- 
wise have  been  the  market  rate."  ^ 

Henry  S.  Pritchett,  of  the  Carnegie  Founda- 
tion for  the  Advancement  of  Teaching: 

"Salaries  are  undoubtedly  lowered  in  the  course 
of  time  by  a  free  pension  system,  but  not  to  such 
an  extent  as  to  prevent  the  pension  roll  from  be- 
coming an  enormous  burden."  ^ 

"The  notion  that  in  the  free  pension  the  bene- 
ficiary gets  something  for  nothing  is  an  illusion. 
There  is  no  free  pension  where  the  questions  of 
wages  and  pension  are  involved  together.  In 
the  course  of  a  limited  number  of  years  such 
pensions  will  be  adjusted  to  the  salary  or  wage 
scale.  Under  such  conditions  all  salaries  will  be 
affected,  while  only  a  minority  will  get  pen- 
sions." ^ 

The  deferred  pay  principle  does  not  necessarily 
involve  a  depression  of  current  money  wages  in 
order  to  make  that  principle  operative.  If  the 
pension  is  a  substantial  inducement  for  the 
worker  to  remain  in  the  service  rather  than  to  go 
elsewhere,  then  the  worker  has  an  equity  in  the 

^"Old  Age  Pensions,  A  Collection  of  Short  Papers":  p.  HI. 
'  Carnegie   Foundation  for  the   Advancement  of  Teaching, 
Bulletin  No.  9,  p.  8. 

'Carnegie  Foundation,  13th  Annual  Report,  p.  21. 


"DISCRETIONARY"  TYPE  57 

benefit,  even  though  his  current  money  wages 
have  not  been  depressed.  In  this  case  it  becomes 
a  part  of  the  consideration  for  which  service  is 
rendered.    As  one  writer  has  said: 

"A  pension  is  as  much  a  part  of  an  employee's 
real  wages  as  are  conditions  of  labor,  guarantee  of 
steady  employment,  board  and  lodging  (where 
these  are  included),  medical  attention,  half  pay 
in  case  of  sickness,  and  other  features  not  included 
in  the  actual  money  wages  received. 

"In  order  to  get  a  full  understanding  of  old- 
age  and  service  pensions,  they  should  be  consid- 
ered as  a  part  of  the  real  wages  of  a  workman. 
There  is  a  tendency  to  speak  of  these  wages  as 
being  paid  by  the  company,  or,  in  cases  where 
the  employee  contributes  a  portion,  as  being  paid 
partly  by  the  employer  and  partly  by  the  em- 
ployee. In  a  certain  sense,  of  course,  this  may 
be  correct,  but  it  leads  to  confusion.  A  pension 
system  considered  as  part  of  the  real  wages  of  an 
employee  is  really  paid  by  the  employee,  not  per- 
haps in  money,  but  in  the  foregoing  of  an  increase 
in  wages  which  he  might  obtain  except  for  the 
establishment  of  a  pension  system."  ^ 

That  a  pension  is  essentially  in  the  nature  of 
deferred  pay  was  repeatedly  asserted  by  the  Sub- 
Committee  of  the  Executive  Committee  of  King 
Edward's  Hospital  Fund  for  London,  which  made 
an  unusually  exhaustive  study    of   the   pension 

*  Albert  de  Roode.     "Pensions  as  Wages."    American  Eco- 
nomic Review,  March,  1913. 


58         INDUSTRIAL  PENSION  SYSTEMS 

problem  extending  over  a  period  of  several  years. 
The  opinion  of  the  committee  is  perhaps  the 
more  significant  because  of  the  popular  feeling 
that  money  subscribed  to  a  hospital  for  the  sake 
of  the  poor  should  not  be  used  for  the  granting 
of  pensions.  The  committee  rejected  this  idea 
and  emphatically  endorsed  the  contention  that 
pensions  are  in  the  nature  of  deferred  pay.^ 

Furthermore,  testimony  by  Sir  Francis  Mowatt 
before  the  Courtney  Commission  of  Great  Britain 
showed  conclusively  that  salaries  were  lower  in 
certain  branches  of  the  Civil  Service  where  pen- 
sions were  paid,  than  in  others  where  no  pen- 
sions were  paid.  Extracts  from  his  testimony 
follow.^ 

"Now  in  fixing  the  scale  of  pay  of  your  dif- 
ferent servants,  you  necessarily  have  some  regard 
to  the  advantage  secured  by  that  annuity? 

"Yes.  .  .  .  I  do  not  think  I  can  go  nearer  than 
this — that  of  late  years  when  we  have  moved 
men  from  the  non-pensionable  part  of  the  Ser- 
vice to  the  pensionable  part  of  the  Service  we 
have  usually  reduced  their  pay  by  something  un- 
der ten  per  cent.  But  I  must  explain  to  the  Com- 
mission that  that  does  not  mean  a  permanent 
reduction  of  ten  per  cent  throughout  their  service, 

'Report  of  Sub-Committee  of  the  Executive  Committee  of 
King  Edward's  Hospital  Fund:  "Pensions  for  Hospital  Officers 
and  Staffs,"  p.  5. 

"^  "Pensions  for  Hospital  Officers  and  Staffs,"  pp.  48-49. 


"DISCRETIONARY"  TYPE  59 

but  only  this — that  so  long  as  they  are  in  the 
particular  class  to  which  they  are  transferred 
that  deduction  is  continued.  .    .   . 

"My  own  definition  of  deferred  pay,  which 
perhaps  you  will  allow  me  to  give  again  with  ref- 
erence to  this,  is  really  this,  that  there  is  no  doubt 
that  a  part  of  a  Civil  Servant's  remuneration  is 
deferred  pay  in  this  sense,  that  it  is  remuneration 
which  is  deferred  from  his  immediate  salary,  and 
applied  towards  granting  him  a  pension.  In 
that  sense,  and  within  the  conditions  of  the  Ser- 
vice which  he  joins,  that  is  a  deferment  from  his 
actual  remuneration;  if  there  were  no  pension 
he  would  no  doubt  get  some  more  pay." 

As  further  evidence  of  the  effect  of  a  pension 
system  upon  wages,  it  may  be  noted  that  a  rail- 
way employee,  testifying  before  the  British  Board 
of  Trade  Committee  on  Superannuation  Funds, 
stated  that  "men  are  deterred  from  leaving  the 
service  on  account  of  their  prospective  pensions," 
that  is,  "if  there  had  been  no  pensions  to  look 
forward  to,  of  course  the  salaries  would  need  to 
be  higher."  This  witness  also  stated  that  many 
of  his  acquaintances  "refused  to  leave  the  service 
although  they  have  been  offered  a  larger  salary, 
because  of  the  prospective  pensions."  ^ 

Testimony  to  the  same  general  effect  was  given 
by  a  government  employee  before    the    British 

*  British  Parliamentary  Papers,  1911,  Vol.  XXIX,  Part  1, 
p.  93.    Quoted  by  Meriam,  p.  20. 


60         INDUSTRIAL  PENSION  SYSTEMS 

Royal  Commission  on  Superannuation  and  Civil 
Service.  This  witness  contended  that  "there  is  a 
gi'eat  deal  of  Phariseeism"  in  the  argument  that 
a  pension  system  was  based  upon  the  fact  that 
government  authorities  did  "not  like  to  see  their 
servants  practically  in  the  gutter  in  old  age."  He 
further  stated:  "So  far  as  a  company  may  be 
said  to  contribute  to  such  a  fund,  I  most  unhesi- 
tatingly assert  that  it  is  simply  a  portion  of  the 
man's  wages  paid  year  by  year  for  a  specific  pur- 
pose: it  is  simply  paid  in  another  way."  ^ 

In  further  support  of  the  contention  that  the 
non-contributory  pension  is  essentially  deferred 
pay,  the  action  of  the  civil  servants  under  the 
British  Crown  toward  a  pension  system  which 
had  been  maintained  for  a  long  period  of  years 
is  often  cited :  While  the  British  Civil  Service  plan 
did  not  require  contributions,  70,000  out  of 
100,000  employees  contended  that  the  pensions 
were  deferred  pay,  and  expressed  a  preference  for 
a  contributory  system.  Their  contention  as  to 
the  deferred  pay  issue  was  sustained  by  the  com- 
mission appointed  to  study  the  matter.^ 

The  contention  of  these  various  students  of  the 
problem  that  "free"  pensions  are  essentially  de- 

'  British  Parliamentary  Papers,  1903,  Vol.  XXXIII,  p.  84. 
Quoted  by  Meriam,  p.  20. 

^  The  Carnegie  Foundation  for  the  Advancement  of  Teach- 
ing.   Bulletin  No.  9,  1916,  p.  35. 


"DISCRETIONARY"  TYPE  61 

ferred  pay  was  endorsed  by  numerous  pension 
authorities  and  economists  interviewed  in  the 
course  of  the  current  investigation. 

As  opposed  to  these  opinions  in  support  of 
the  deferred-pay  principle,  it  is  often  held  by 
industrial  employers  that  pension  systems  have 
no  effect  on  the  current  rate  of  wages.  Some  em- 
ployers point  to  the  fact  that  they  do  not  hold  out 
the  prospect  of  a  pension  to  the  worker  when  he 
seeks  employment,  but,  indeed,  that  they  forbid 
their  employment  executives  to  refer  to  the  ex- 
istence of  a  pension  plan.  This  reaUy  has  little 
significance.  In  a  great  many  cases  the  prospec- 
tive employee  will  know  whether  or  not  the 
company  maintains  a  pension  system.  Moreover, 
in  private  industry  it  is  a  matter  of  relatively 
small  consequence  whether  the  employee  con- 
siders the  pension  in  making  his  original  wage 
bargain.  He  will  know  of  the  plan  almost  imme- 
diately after  he  enters  the  service,  and  its  appeal 
will  have  more  weight  with  him  in  the  event  of 
contemplated  separation  from  the  service  than 
when  he  originally  seeks  employment.  As  a  mat- 
ter of  fact,  there  is  an  inconsistency  in  regarding 
new  workers  as  within  the  scope  of  a  pension  plan. 
Until  an  employee  has  passed  through  the  initial 
period  of  heavy  labor  turnover  he  should  not  be 
looked  upon  as  a  prospective  pensioner. 


62         INDUSTRIAL  PENSION  SYSTEMS 

Other  employers  having  pension  plans  point  to 
the  fact  that  they  pay  the  prevailing  rate  of 
wages.  Thus,  the  executive  of  one  large  com- 
pany having  a  non-contributory  plan  stated: 

"As  far  as  the  practice  of  this  Company  is  con- 
cerned, a  pension  has  nothing  of  the  nature  of 
deferred  pay.  We  pay  wages  equal  at  least  to  the 
prevailing  rate,  and  in  some  cases  more.  A  pen- 
sion cannot  in  my  judgment  partake  of  the  nature 
of  deferred  pay  unless  similar  pension  systems  are 
universally  adopted  in  industry." 

A  writer  on  labor  questions,  in  this  connection, 
has  said : 

"Regardless  of  pension  plans  it  is  obvious  that 
the  wage  rate  will  have  to  approximate  the  rate 
prevailing  in  the  community."  ^ 

If  pension  systems  were  in  practically  universal 
operation  the  argument  that  they  are  not  in  the 
nature  of  "deferred  pay"  would  have  considerable 
weight.  Under  the  working  of  competition,  how- 
ever, the  establishment  paying  pensions  must 
meet  the  prices  named  by  those  who  are  not  under 
this  expense.  Under  such  conditions  it  will  be 
difi&cult,  if  not  impossible,  to  pass  the  cost  of  a 
pension  system  on  to  the  consumer.  The  cost 
must,  therefore,  come  out  of  wages  or  out  of 
profits.    The  employer  naturally  will  try  to  avoid 

*  John  A.  Fitch.    The  Survey. 


"DISCRETIONARY"  TYPE  63 

a  sacrifice  of  his  profits,  and  in  view  of  the  dis- 
cussion and  evidence  just  presented,  it  seems  rea- 
sonably certain  that  he  will,  consciously  or  un- 
consciously, endeavor  to  recoup  the  cost  out  of 
the  wage. 

In  this  connection  the  following  statement  by 
Dr.  A.  T.  Hadley,  of  Yale  University,  may  be 
noted : 

"The  payments  to  the  insurance  funds  must 
chiefly,  if  not  wholly,  come  out  of  wages.  Even 
though  they  be  nominally  levied  on  the  employer, 
he  is  compelled  by  competition  with  other  em- 
ployers not  subject  to  this  levy,  to  reduce  in  cor- 
responding degree  the  wages  he  pays.'" ' 


"  1 


A  theory  of  pensions  has  been  advanced  to  the 
effect  that  the  employer's  contribution  to  a  pen- 
sion scheme  is,  at  least  in  part,  similar  to  a  charge 
for  depreciation  or  insurance,  and  that  "in  so  far 
as  such  a  payment  by  the  employer  is  for  insur- 
ance against  that  waste  and  inefficiency  in  his 
establishment  which  would  result  from  retaining 
superannuated  employees  and  for  protection 
against  that  discontent  which  would  result  from 
discharging  the  superannuated  without  providing 
for  them  financially,  it  is  a  part  of  the  business 
expense."  - 

'A.  T.  Hadley.    "Economics,"  pp.  60-61. 

*  Louis  D.  Brandcis.    "Business  a  Profession,"  pp.  67-60. 


64         INDUSTRIAL  PENSION  SYSTEMS 

If  this  theory  of  pensions  be  accepted,  it  might 
be  argued  that  the  employer's  contribution,  at 
least  in  part,  is  charged  into  the  selling  cost  of  the 
goods  and  is,  therefore,  secured  from  the  consumer 
rather  than  out  of  the  wages  of  the  worker.^ 

Conclusions  as  to  Deferred-Pay  Issue 

Notwithstanding  the  formidable  array  of 
opinion  that  a  pension  is  essentially  deferred  pay, 
in  the  sense  that  it  depresses  the  current  rate  of 
wages,  this  principle  appears  to  be  subject  to  im- 
portant limitations  in  its  practical  application. 
In  order  that  the  deferred-pay  principle  shall 
actually  be  operative,  it  is  imperative  that  pay- 
ment of  the  pension  shall  be  reasonably  assured. 
Several  of  the  statements  above  quoted,  to  the 
effect  that  a  pension  tends  to  depress  the  rate  of 
wages,  have  reference  to  governmental  pension 
systems.  In  the  government  service,  as  already 
emphasized,  there  is  ordinarily  no  question  as  to 
the  financial  responsibility  of  the  employer,  or  its 
continuance  as  an  employer.     Moreover,  many 

^  It  is  possible  that  some  of  the  difference  of  opinion  on  this 
point  is  due  to  the  fact  that  many  pension  systems  have  been 
put  into  effect  by  great  corporations,  frequently  by  those  com- 
monly designated  as  trusts,  and  that  such  employers  may  find 
it  easier  to  pass  the  cost  of  a  pension  system  along  to  the 
consumer  in  the  form  of  increased  prices  of  products  than 
would  a  smaller  establishment.  It  is  doubtful,  however, 
whether  the  cost  of  a  pension  system  is,  as  a  matter  of  fact, 
entirely  charged  into  the  price  of  the  product. 


"DISCRETIONARY"  TYPE  65 

employees  ent€r  the  government  service  with  the 
intention  of  making  it  a  lifework  and,  generally 
speaking,  feel  a  relatively  high  degree  of  security 
in  their  positions. 

Where  such  conditions  obtain  it  seems  inevi- 
table that  the  tendency  of  a  non-contributory 
pension  system  will  be  to  depress  the  rate  of 
wages.  In  the  case  of  employees  in  the  British 
Civil  Service,  moreover,  the  evidence  that  this 
was  the  actual  effect  is  convincing.  The  testi- 
mony (see  p.  39)  is  specific  that  the  current  com- 
pensation of  employees  in  certain  pensionable 
classes  was  appreciably  lower  than  that  of  other 
workers  of  the  same  grade  in  non-pensionable 
positions. 

Where,  however,  the  pension  promise  is  sur- 
rounded by  many  conditions,  or  where  the  re- 
sponsibility of  the  employer  or  his  continuance 
in  business  is  uncertain,  or  where  the  turnover 
of  labor  is  exceptionally  high,  it  seems  doubtful 
whether  a  pension  system  has  a  significant  effect 
on  the  rate  of  wages;  this  is  especially  true  in 
the  case  of  workers  under  middle  age.  In  other 
words,  if  the  expectation  of  receiving  a  pension 
is  extremely  vague,  then  it  would  seem  almost 
axiomatic  that  the  effect  on  current  wages  will  be 
correspondingly  modified. 

If  this  view  be  accepted,  it  follows  that  the 


66         INDUSTRIAL  PENSION  SYSTEMS 

actual  effect  of  a  pension  system  in  depressing 
the  current  rate  of  pay  would  ordinarily  be  much 
less  marked  in  the  case  of  employees  in  a  private 
industrial  establishment  than  in  the  case  of  pub- 
lic service  employees  such,  for  instance,  as  mem- 
bers of  the  police  or  fire  department  forces, 
teachers,  or  even  clerical  workers. 

The  amount  of  the  pension  benefit  has  an  im- 
portant bearing  on  this  question.  Even  if  the 
worker  counts  with  considerable  confidence  on  the 
receipt  of  a  pension,  it  will  not  be  a  material 
influence  with  respect  to  current  compensation 
unless  it  is  of  substantial  amount.  On  the  other 
hand,  the  promise  of  a  large  pension  may  exert  a 
very  appreciable  influence. 

As  the  worker's  period  of  service  lengthens  and 
as  he  approaches  the  retirement  age,  it  seems 
obvious  that  the  prospect  of  a  pension  will  have 
an  increasing  appeal  and  wull  exert  a  more  certain 
effect  upon  the  current  rate  of  pay.  At  the  same 
time,  also,  it  seems  inevitable  that  the  employer 
wiU  take  this  attitude  of  the  workers  into  con- 
sideration in  determining  wages.  He  may  not 
reduce  wages  because  of  the  prospective  pension 
benefit,  but  he  may  very  naturally  hesitate  to 
increase  the  wages  of  his  older  workers  in  view 
of  the  prospect  that  in  the  near  future  he  wiU  be 


"DISCRETIONARY"  TYPE  67 

paying  them  a  pension,  although  they  will  no 
longer  be  rendering  him  service. 

The  conclusion  seems  warranted,  therefore,  that 
the  theory  of  deferred  pay  holds  whenever  and 
wherever  the  pension  benefit  is  counted  upon  with 
reasonable  certainty  by  the  worker.  The  actual 
effect  upon  the  current  rate  of  wages  will  depend 
on  the  amomit  of  tlie  benefit  and  on  the  condi- 
tions surrounding  its  payment. 

As  a  corollary  it  follows  that  in  such  cases  a 
worker  actually  has  a  right  to  a  pension,  at  least 
to  the  extent  that  the  principle  of  deferred  pay 
has  actually  been  operative.^  If  he  suffers  a  reduc- 
tion in  wages,  or  foregoes  an  increase  in  wageS; 
because  of  his  confidence  that  the  promised  pen- 
sion actually  will  be  received,  he  cannot  justly 
be  denied  that  benefit  if  he  has  rendered  the 
service. 

The  non-contributory  system  of  the  "discre- 
tionary" type  flatly  denies  any  such  contractual 
right  on  the  part  of  the  worker.  It  seems  incon- 
trovertible that  this  denial  of  a  contractual  right 
is  a  serious  if,  indeed,  not  a  fatal  defect  of  such 
systems. 

The  comparative  uniformity  with  which  spe- 

^  It  may  be  noted  that  the  deferred-pay  principle  does  not 
apply  to  back  service  rendered  before  the  introduction  of  a 
pension  system.    For  a  discussion  of  this  point,  see  p.  176. 


68         INDUSTRIAL  PENSION  SYSTEMS 

cific  waivers  of  contractual  liability  are  included 
in  pension  plans  of  the  discretionary  type  suggests 
that  their  authors  are  fearful  that  such  a  liability 
might  otherwise  be  claimed. 

It  has  been  held  by  a  New  York  court  that  an 
employee  dismissed  from  service  has  no  right  to 
any  accrued  share  of  a  pension  under  a  system 
where  employees  have  not  contributed  to  the 
fund.^    The  Court  said : 

"Under  the  regulations  established,  it  seems  to 
me  that  none  of  the  employees  has  a  vested  in- 
terest in  any  part  of  this  fund,  even  though 
credited  upon  his  pass  book,  until  the  gift  is  com- 
pleted by  actual  payment."  - 

So  far  as  known  this  question  has  not  arisen 
with  respect  to  the  continuance  of  a  pension  once 
entered  upon. 

Argument  That  a  Pension  Is  Pay  "Conditionally" 
Dej  erred 

Accepting  the  principle  of  deferred  pay  as 
sound  within  a  more  or  less  limited  field,  there 

^McNevin  v.  Solvay  Process  Co.,  32  App.  Div.  610;  affirmed 
166  N.  Y.  530. 

'  It  may  be  noted  that  one  wTiter,  in  commenting  upon  this 
case,  has  said: 

"It  might  be  well  to  suggest,  however,  that  lack  of  consid- 
eration has  always  given  the  equity  side  of  the  courts  oppor- 
tunity to  step  in.  It  is  not  improbable  that  if  the  rnatter 
were  ever  brought  into  the   courts  elsewhere,  this  particular 


"DISCRETIONARY"  TYPE  69 

remains  the  collateral  question  whether  the  pen- 
sion is  pay  unconditionally  deferred,  so  that  the 
worker  has  at  all  times  an  "accrued  vested  right," 
or  whether  it  is  deferred  subject  to  conditions 
which  vitally  affect  the  worker's  equities  therein. 
That  the  right  of  the  worker  to  a  pension  as 
deferred  pay  is  a  conditional  right  was  asserted 
by  the  so-called  Courtney  Commission  of  Great 
Britain,  appointed  in  1902,  which  held  in  sub- 
stance that 

"a  deferred  pension  is  remuneration  for  services 
as  much  as  an  immediate  money  payment;  but 
it  is,  in  part  at  least,  remuneration  for  continuity 
of  service  contingently  payable  on  the  continuity 
being  maintained  during  a  defined  period  and  not 
accruing  from  year  to  year  as  an  indefeasible  in- 
terest." 1 

This  distinction  is  one  of  great  practical  impor- 
tance. It  obviously  has  a  vital  bearing  on  the 
right  of  the  worker  to  a  withdrawal  equity  in  the 
event  of  his  separation  from  the  service. 

This  contention  that  the  worker's  right  to  a 
pension  as  deferred  pay  accrues  only  upon  the 
completion  of  a  stipulated  period  of  service  is, 

part  of  the  plan  might  be  set  aside  on  this  ground,  as  well  as 
on  the  ground  of  being  against  public  policy."     (Albert  de 
Roode.     "Pensions  as  Wages."     American  Economic  Review, 
March,  1913.) 
"Tensions  for  Hospital  Officers  and  Staffs,"  p.  47. 


70         INDUSTRIAL  PENSION  SYSTEMS 

however,  by  no  means  universally  accepted. 
Thus  the  Sub-Coinmittee  of  the  Executive  Com- 
mittee of  King  Edward's  Hospital  Fund  for  Lon- 
don, in  discussing  this  point,  declared  itself  "in 
favor  of  the  principle  that  every  year  of  hospital 
service,  whenever  and  wherever  given,  should  be 
regarded  as  pensionable  with  rights  vesting  ac- 
cordingly." 

While  this  statement  was  made  with  special 
reference  to  the  hospital  services  then  under  con- 
sideration, it  seems  worthy  of  notice  in  connection 
with  discussions  of  private  pension  systems. 

In  the  article  already  cited,^  de  Roode  likewise 
held  that  the  right  of  the  w^orker  to  a  pension 
accrues  from  year  to  year,  subject,  however,  to 
the  condition  that  the  right  might  begin  to  accrue 
only  after  some  stipulated,  but  relatively  brief, 
period  of  service.    In  this  connection,  he  said : 

"Considering  pensions  as  a  part  of  wages,  the 
contributions  made  each  year  to  the  pension  fund 
by  the  Government  should  be  considered,  subject 
to  one  exception,  as  deferred  wages,  payable  to 
the  employee  upon  separation  from  the  service, 
or  to  his  heirs  in  case  of  death.  The  exception  to 
this  general  principle  should  be  in  the  case  of  the 
early  years  of  service.  A  pension  is  not  a  mere 
increase  in  wages;  it  is  an  inducement  to  con- 
tinued service.    Many  persons  enter  government 

*  "Pensions  as  Wages."    American  Economic  Review,  March, 
1913. 


"DISCRETIONARY"  TYPE  71 

service  as  a  temporary  occupation.  The  right  of 
the  employee,  therefore,  to  the  accrued  value  of 
his  pension  should  not  commence  until  he  has 
passed  what  might  be  called  the  temporary  stage. 
Roughly  speaking,  this  would  be  five  or  six  years, 
and  the  accrued  value  of  the  pension  returned  to 
him  upon  separation  would  commence  with  the 
beginning  of  what  might  be  called  the  more  per- 
manent service."  ^ 

If  the  theory  be  accepted  that  a  non-contribu- 
tory pension  is  pay  "conditionally"  deferred  over 
practically  the  entire  working  life  of  the  em- 
ployee, it  obviously  is  but  a  short  step  from  the 
use  of  a  pension  as  a  promise,  or  inducement,  to 
its  use  as  a  club  or  threat  to  compel  workers  to 
remain  in  the  service.  Some  of  the  objections  to 
a  policy  of  compulsion  have  already  been  noted. 
At  least  if  pressure  is  to  be  brought  upon  workers 
to  continue  in  the  service,  it  would  seem  that  some 
far  less  cumbersome  method  could  be  devised  than 
the  inauguration  of  a  pension  system,  with  its 
heavy  and  uncertain  financial  burden. 

One  effect  of  such  an  interpretation,  as  already 
pointed  out,  is  to  produce  great  inequity  as  be- 
tween workers.    The  worker  who   is   fortunate 

'  It  will  be  noted  that  this  statement  had  special  reference 
to  employees  in  the  public  service.  However,  deRoode  held 
that  "pensions  for  public  employees  should  be  considered 
from  the  same  fundamental  basis  as  pensions  for  private  em- 
ployees, and  they  should  no  less  be  considered  as  part  of 
wages." 


72         INDUSTRIAL  PENSION  SYSTEMS 

enough  to  continue  in  the  service  until  the  retire- 
ment age  may  receive  a  very  large  benefit;  the 
much  larger  number  who  fall  short  of  the  retire- 
ment age  may,  and  usually  do,  get  nothing. 

Objection  to  such  interpretation  of  pensions  has 
been  taken  by  one  writer  ^  on  the  ground  that, 
just  as  a  life  contract  between  a  private  employer 
and  an  employee  would  not  be  sustained  in  the 
courts,  as  being  against  public  policy,  likewise 
a  contract  would  be  objectionable,  any  part  of  the 
consideration  for  which  was  conditional  upon  life 
service  to  the  retirement  age.  While  the  objec- 
tion in  question  had  reference  to  pensions  in  the 
public  service,  again  it  seems  applicable  to  private 
pension  systems. 

Conception  of  Pension  Systems  as  a  Form   of 
Tontine  Insurance  Indefensible 

One  further  suggestion  relative  to  the  deferred- 
pay  theory  remains  to  be  considered,  namely,  that 
while  a  pension  may  be  regarded  as  deferred  pay, 
it  is  deferred  pay  to  be  invested  in  a  tontine  in- 
surance scheme  under  which,  admittedly,  many 
will  contribute  but  only  a  few  benefit.  It  has 
been  argued  by  some  that  so  long  as  the  facts  are 
fairly  placed  before  the  worker  there  is  no  ground 

^  Lewis  Meriam.     "Principles  Governing  the  Retirement  of 
Public  Employees,"  pp.  420-421. 


"DISCRETIONARY"  TYPE  73 

for  criticism  if  he  chooses  to  take  his  chances  in 
such  a  scheme. 

One  answer  to  this  is  that  tontine  insurance 
is  very  generally  condemned  and,  in  some  states 
of  this  country,  is  flatly  forbidden  by  law. 
A  point  of  more  importance  is  that  employees 
as  a  rule  do  not  "choose"  to  enter  upon  pension 
plans.  Non-contributory  plans  clearly  are  at  the 
employer's  option.  In  most  contributory  plans, 
moreover,  participation  is  compulsory,  at  least  for 
new  employees.  Practically,  therefore,  there  is 
no  "choice"  in  either  case. 

The  conception  of  pension  systems  as  a  form  of 
mutual  insurance  on  the  tontine  plan  has  been 
very  generally  condemned  by  most  students  of 
pension  problems.  Thus,  the  Massachusetts  Pen- 
sion Commission,  in  its  1914  report,  said  on  this 
point: 

"That  a  pension  is  a  deferred  wage  implies 
that  the  employee  has  earned  a  certain  wage^^part 
of  which  is  retained  by  the  employer  to  be  paid 
him  on  retirement  at  a  stated  age.  But  what  be- 
comes, under  such  a  theory,  of  the  defeiTed  wages 
earned  by  the  employee  who  leaves  the  service  or 
dies?  He  forfeits  that  part  of  his  wages  which  has 
not  been  paid  because  deferred,  and  the  forfeited 
wages  become  part  of  a  fund  from  which  are  paid 
the  pensions  of  those  who  survive  to  the  pension- 
able age.  This  is  in  fact  a  tontine  system,  which 
is  to-day  condemned  by  the  best  insurance  laws. 


74         INDUSTRIAL  PENSION  SYSTEMS 

"Looking  the  question  squarely  in  the  face, 
would  the  employees  assent  to  a  pension  upon 
the  theory  of  deferred  wages,  and  consent  that 
part  of  their  wages  be  held  back  for  the  benefit  of 
those  who  survive  to  the  pensionable  age?  Upon 
such  a  theory  the  employee,  in  order  to  recover 
his  wages,  would  have  to  succeed  in  three  things: 
living  to  a  certain  age,  remaining  in  the  service 
until  that  age,  and  living  beyond  that  age  long 
enough  to  get  back  the  value  of  his  contributions." 

It  should  be  noted  that  while  this  might  seem 
to  be  an  argument  against  the  validity  of  the 
deferred-pay  theory,  in  reality  it  does  not  dis- 
credit that  theory,  but  rather  discredits  pension 
systems  which  do  not  recognize  that  theory  by 
definitely  assuring  some  compensating  benefit  in 
return  for  the  pay  thus  deferred. 

The  New  Jersey  Bureau  of  State  Research,  in 
discussing  this  phase  of  the  problem,  said : 

"The  'tontine'  or  forfeiture  feature  was  very 
early  introduced,  in  a  somewhat  modified  form,  in 
the  pension  funds  in  France  and  Great  Britain, 
and  from  there  was  copied  into  the  pension  funds 
in  the  United  States.  A  movement  to  rid  our 
pension  funds  of  this  feature  is  already  on  foot. 
The  first  steps  along  this  line  were  taken  by 
Massachusetts,  New  York  City,  Pennsylvania, 
and  Connecticut,  which  have  in  their  new  systems 
supplanted  the  tontine  features  by  sound  insur- 
ance and  savings  features."  ^ 

*  "Teachers'  Retirement  Systems  in  New  Jersey,  Their 
Fallacies  and  Evolution."  Report  prepared  by  Paul  Studen- 
sky,  1918,  p.  64. 


"DISCRETIONARY"  TYPE  75 

While  this  statement  had  reference  to  a  con- 
tributory system,  the  objection  to  the  tontine 
principle  is  applicable  to  a  non-contributory  sys- 
tem in  so  far  as  the  deferred-pay  theory  is  op- 
erative. 

Effect  of  Non-Contributory  Pension  Systems  on 
Thrift 

An  objection  frequently  urged  against  non- 
contributory  pension  systems  is  that  they  neces- 
sarily tend  to  discourage  habits  of  thrift.  If  some 
one,  whether  the  State  or  the  individual  employer, 
assures  a  group  of  individuals  that  their  old  age 
will  be  provided  for,  and  if  that  assurance  is  relied 
upon,  the  beneficiaries  will,  it  is  argued,  have  less 
incentive  to  provide  for  themselves.  On  this 
point  the  Massachusetts  Commission  on  Old  Age 
Pensions,  Annuities,  and  Insurance  said:  ^ 

"A  non-contributory  pension  system  would 
weaken  the  motive  to  individual  saving,  and 
would  react  unfavorably  on  character,  by  lessen- 
ing the  sense  of  personal  responsibility  and  inde- 
pendence. .  .  . 

"The  process  of  social  betterment  clearly  mani- 
fest in  the  advance  of  wages,  the  increase  of  sav- 
ing, and  the  decline  of  pauperism,  will  continue, 
unless  the  forces  that  have  been  bringing  it  about 
are  undermined  by  unwise  social  legislation.  .  .  . 

'Report,  1910,  pp.  301,  308,  309. 


76         INDUSTRIAL  PENSION  SYSTEMS 

By  establishing  a  pension  system  for  the  benefit 
of  the  few  who  may  perhaps  need  such  aid,  the 
State  would  strike  a  blow  at  the  resources  of 
thrift,  individual  responsibility,  and  family  in- 
tegrity, which  have  enabled  the  great  majority 
of  the  population  to  maintain  themselves  in  self- 
supporting  independence.  In  the  impatient  effort 
to  help  things  forward  at  a  faster  pace,  we  should, 
by  attempting  an  experiment  with  non-contribu- 
tory pensions,  immediately  retard  and  ultimately 
reverse  the  process  of  social  betterment." 

A  similar  opinion,  with  respect  to  general  old 
age  pensions,  was  expressed  by  W.  E,  H.  Lecky, 
as  follows: 

"It  proposes  to  teach  the  whole  working  popu- 
lation to  look  to  the  State,  and  not  to  themselyes, 
for  the  provision  for  their  old  age  and  for  the 
old  age  of  those  who  might  be  dependent  on  them, 
and  thus  to  destroy  the  most  powerful  of  all  mo- 
tives to  thrift,  the  very  mainspring  of  productive 
and  self-sacrificing  industry.  .  .  . 

"Can  it  be  seriously  believed  that  the  addition 
of  many  millions  a  year  to  the  state  funds  directly 
employed  in  the  relief  of  poverty  will,  in  the  long 
run,  tend  to  diminish  pauperism  or  to  encourage 
self-reliance  and  thrift?"  ^ 

Still  another  opinion  to  the  same  effect  may  be 
cited : 

'  W.  E.  H.  Lecky,  article  in  Forum,  Feb.,  1900.  pp.  694,  695. 
Quoted  from  Report  of  Massachusetts  Commission  on  Old 
Age  Pensions,  Annuities  and  Insurance,  1910,  p.  309. 


"DISCRETIONARY"  TYPE  77 

"The  establishment  of  such  a  system  would 
constitute  a  definite  abandonment  of  the  hope 
that  any  large  proportion  of  the  poor  will  ever  be 
able  to  provide  for  their  old  age,  by  the  improve- 
ment of  wages  and  increases  in  their  sense  of  re- 
sponsibility." ^ 

While  several  of  these  criticisms  are  directed 
at  government  old  age  pensions,  nevertheless  they 
seem  applicable,  at  least  to  a  considerable  extent, 
to  private  pension  plans  of  the  non-contributory 
type.  Here  again,  however,  the  actual  effect  of 
a  non-contributory  system  will  largely  depend 
upon  the  certainty  of  the  pension  promise  from 
the  standpoint  of  the  worker.  Where  the  State 
pays  a  free  pension  the  recipient  will  count  with 
almost  complete  assurance  upon  it  and,  in  such 
cases,  it  seems  almost  axiomatic  that  he  will  have 
correspondingly  less  incentive  to  provide  for  him- 
self. In  many  private  schemes,  as  already  shown, 
the  worker  has  no  such  positive  assurance  as 
under  a  state  pension.  If  he  counts  with  only  a 
vague  hope  on  ever  receiving  a  benefit,  it  may 
fairly  be  questioned  how  far  the  existence  of  a 
pension  system  will  lead  him  to  abandon  habits 
of  thrift. 

The  view  is,  however,  held  by  some  pension 
critics  that  one  of  the  greatest  handicaps  to  thrift 

^"Old  Age  Pensions:  A  Collection  of  Short  Papers,"  p.  12. 
Quoted  from  Report  of  Massachusetts  Commission  on  Old 
Age  Pensions,   Annuities  and  Insurance,   1910,  p.   309. 


78         INDUSTRIAL  PENSION  SYSTEMS 

is  the  difficulty  of  getting  a  start,  and  that  this 
requires  so  much  sacrifice  that  the  worker,  espe- 
cially if  he  encounters  sickness,  accident,  or  other 
misfortune,  is  easily  discouraged.  These  critics 
hold  that  the  prospect  of  even  a  very  moderate 
pension  may  prove  an  incentive  to  saving,  rather 
than  otherwise.^ 

In  considering  this  argument  the  fact  of  every- 
day experience  should  not  be  overlooked,  that 
thrift  is  often  found  among  those  who  appear  to 
have  the  greatest  burdens  to  carry,  while  extrava- 
gance as  frequently  occurs  among  those  with  the 
fewest  responsibilities  and  apparently  the  best 
opportunities  for  saving. 

The  argument  that  lack  of  thrift  is  partly  due 
to  difficulties  in  getting  a  start  may  have  some 
force,  but  on  the  whole  the  conclusion  seems  justi- 
fied that  a  non-contributory  pension  system, 
either  in  public  or  private  employment,  has  a 
tendency  to  discourage,  rather  than  to  stimulate, 
individual  thrift. 

Conclusions  as  to  Non-Contributory  Systems  of 
the  "Discretionary"  Type 

The  preceding  discussion  shows  that  there  is  a 
conflict  of  opinion  as  to  whether,  and  particularly 

^This  point  of  view  is  clearly  reflected  in  a  discussion  of 
the  British  Pension  Act  of  1908  by  Henry  R.  Seager.  (Article 
in  Charities  and  Commons,  October  3,  1908.) 


"DISCRETIONARY"  TYPE  79 

as  to  how  far,  a  non-contributory  pension  system 
savors  of  the  nature  of  deferred  pay,  and  still 
further  disagreement  and  confusion  as  to  how  far 
that  system  directly  affects  the  current  rate  of 
wages.  It  appears,  however,  that  the  following 
facts  are  fairly  well  established: 

1.  That,  where  its  receipt  is  considered  by  the 
worker  as  definitely  assured,  a  non-contributory 
pension  is  essentially  deferred  pay  and,  further- 
more, actually  depresses  the  current  rate  of  wages. 

2.  That,  where  the  receipt  of  the  pension  is 
involved  in  great  uncertainty,  or  where  the 
amount  is  very  small,  its  effect  on  the  current  rate 
of  wages  will  be  much  less  marked,  and  possibly 
negligible. 

3.  That  the  theory  that  a  pension  is  pay  "con- 
ditionally" deferred  over  a  long  period  of  years 
is  sharply  disputed  by  some  of  the  best  authori- 
ties. 

4.  That  the  use  of  a  non-contributory  pension 
as  a  sort  of  tontine  insurance  is  very  generally 
condemned. 

5.  That  a  non-contributory  pension  system 
tends  to  discourage  individual  thrift. 

6.  That,  to  justify  itself,  a  pension  system 
should  carry  assurance  that  pensions  will  be  re- 
ceived, in  which  case  the  theory  of  deferred  pay 
becomes  operative. 

7.  That,  in  such  cases,  considerations  of  jus- 
tice demand  that  the  amount  of  pay  deferred  be 


80         INDUSTRIAL  PENSION  SYSTEMS 

regarded  as  rightfully  belonging  to  the  worker  and 
be  returned  to  him  under  equitable  terms,  or  to 
his  heirs  if  he  dies  before  receiving  it.  This  would 
not  prevent  requirement  of  a  brief  period  of  serv- 
ice before  the  worker's  right  should  be  regarded  as 
vested. 

8.  That,  as  a  corollary,  the  "discretionary" 
type  of  private  pension  systems  now  generally  in 
effect  is  objectionable,  or  at  least  falls  far  short 
of  a  reasonably  ideal  system. 

In  effect,  a  non-contributory  system  of  the  "dis- 
cretionary" type  says  to  the  worker: 

//  you   remain   with   this   company   throughout 

your  productive  lifetime, 
//  you  do  not  die  before  the  retirement  age,^ 

//  you  are  not  discharged,  or  laid  off  for  an  ex- 
tended period, 

//  you  are  not  refused  a  benefit  as  a  matter  of 
discipline, 

//  the  company  continues  in  business,  and 

//  the  company  does  not  decide  to  abandon  this 
plan, 

you  wiU  receive  a  pension  at  the  age  of ,  sub- 
ject to  the  contingency  of  its  discontinuance  or 
reduction,  after  it  has  been  entered  upon. 

The  question  immediately  arises:  What  is  the 
justification   of   a   formal   pension   system   sur- 

*Some  systems  of  this  type  provide  a  death  benefit. 


"DISCRETIONARY"  TYPE  81 

rounded  by  so  many  conditions,  waivers,  and 
reservations? 

It  should  be  emphasized  that  the  objection  to 
the  "discretionary"  feature  is  not  the  employer's 
right  to  abandon  or  modify  the  scheme,  but  the 
right  to  make  such  changes  retroactive  by  deny- 
ing any  contractual  right  on  the  worker's  part 
in  the  pension  benefit.  Because  of  the  hazards 
under  which  business  is  conducted  and  the  uncer- 
tainties involved  in  the  financial  phases  of  pen- 
sion systems  themselves,  it  is  imperative  that  the 
right  to  abandon  a  pension  plan  be  reserved  by 
the  employer,  although  that  right  should  be  ex- 
ercised only  after  most  serious  consideration.  But 
to  escape  all  obligations  to  those  who  have  for 
years  rendered  service  with  the  prospect  of  a  pen- 
sion in  view,  is  a  very  different  matter. 

In  this  connection  the  following  comment  by 
the  Special  Committee  on  Industrial  Pensions  of 
the  New  York  Merchants'  Association  is  worthy 
of  special  emphasis: 

"The  corporation  is  quite  right  in  providing 
that  it  reserves  the  right  to  alter  the  rules,  or  to 
free  itself  entirely  from  the  pension  obligation. 
It  should  be  possible  always  to  utilize  experience, 
even  to  the  extent  of  abandoning  the  entire  un- 
dertaking. But  such  reservations  should  always 
be  prospective  only,  they  should  never  take  effect 
retroactively.    To  provide,  as  is  often  done,  that 


82         INDUSTRIAL  PENSION  SYSTEMS 

the  corporation  may  wind  up  the  pension  plan 
at  any  time  without  fulfilling  the  promises 
already  made,  and  then  to  expect  employees  to 
look  forward  with  confidence  and  order  their  lives 
upon  the  strength  of  these  promises,  is  certainly 
inconsistent.  When  the  economic  aspect  of  pen- 
sions is  considered,  such  retroactive  power  of 
revocation  can  hardly  be  considered  as  moral.  .  .  . 

"The  employees  are  entitled  to  a  pension  sys- 
tem which  has  set  up  an  actuarial  balance  over 
the  years  in  which  any  one  of  them  can  expect  to 
be  affected.  If  the  employee  is  required  to  con- 
tribute to  the  pension  system,  this  is  only  honest. 
Even  if  the  pensions  are  apparently  the  free  gift 
of  the  corporation,  and  the  economic  possibility 
of  this  for  a  considerable  period  is  doubtful,  the 
employee  is  entitled  to  look  forward  with  assur- 
ance to  the  pension  promise.  A  pension  prom- 
ise that  is  not  certain  involves  an  uncertain 
morality." 

If  it  could  be  demonstrated  that  the  deferred- 
pay  theory  did  not  hold,  the  various  objections 
to  "discretionary"  systems  on  the  ground  of  in- 
equity might  be  answered  by  the  argument  that, 
in  so  far  as  any  portion  of  the  workers  receive  a 
benefit,  such  a  system  is  better  than  none.  But 
if  in  order  to  pay  benefits  to  a  trifling  percentage 
of  the  force  the  current  wages  of  a  large  propor- 
tion are  reduced,  this  argument  cannot  be  sus- 
tained. 

The  conclusion  seems  forced,   therefore,   that 


"DISCRETIONARY"  TYPE  83 

even  though  a  pension  system  be  financed  wholly 
by  the  employer,  the  worker  has  rights  under  it 
which  cannot  be  denied.  This,  in  turn,  leads  to 
the  conclusion  that  systems  of  the  "discretionary" 
type  cannot  be  justified  or,  at  least,  that  they  do 
not  make  a  reasonable  approach  to  a  practically 
attainable  ideal. 

The  argument  most  frequently  advanced  in 
favor  of  non-contributory  pension  plans  of  the 
"discretionary"  type  is  that  of  simplicity  and  ex- 
pediency. One  of  the  chief  advantages,  in  the 
opinion  of  many  employers,  is  that  complete 
control  lies  in  the  hands  of  the  employer.  Many 
industrial  employers  who  have  carefully  con- 
sidered both  types  and  some  who  are  impressed 
by  certain  advantages  of  the  contributory  system 
have,  nevertheless,  concluded  that  the  practical 
advantages  of  the  non-contributory  type  of  pen- 
sion plan  are  controlling. 

The  following  statement  by  one  employer  fairly 
expresses  the  attitude  of  many  on  this  point: 

"We  discussed  very  thoroughly  the  matter  of 
a  contributory  or  non-contributory  pension  and, 
due  to  the  complexity  of  any  contributory  plan, 
we  decided  to  adopt  the  non-contributory  plan. 
.  .  .  Certainly  the  non-contributory  system  is  far 
simpler  and  easier  of  administration." 

In  view  of  the  deferred-pay  principle  already 


84         INDUSTRIAL  PENSION  SYSTEMS 

discussed,  however,  and  of  the  great  inequality 
which  a  "discretionary"  system  produces  as  be- 
tween workers  who  complete  a  stipulated  period 
of  service  and  the  larger  number  who  fall  short 
of  doing  this,  yet  spend  the  greater  part  of  their 
active  lives  in  the  employ  of  a  given  establish- 
ment, the  conclusion  seems  unavoidable  that  the 
issue  of  expediency  is  not  a  suflBcient  justification 
of  non-contributory  systems  of  the  "discretionary" 
type. 

In  thus  condemning  the  fundamental  principles 
involved  in  "discretionary"  pension  systems,  it 
should  be  recognized  that  such  systems  in  actual 
practice  often  may  be  free  from  some  of  the 
abuses  by  which  they  are  easily  subverted.  Much 
depends  upon  the  spirit  in  which  the  plan  is  actu-i 
ally  administered.  In  many  cases  the  actual  in- 
terpretation of  the  plan  is  far  more  liberal  than 
its  letter.  Employees  who  just  fail  of  reaching 
the  retirement  age  sometimes  are  permitted  to 
participate  in  the  pension  benefit,  at  least  to  some 
extent.  In  general,  however,  no  benefit  is  paid 
under  a  "discretionary"  plan  to  a  worker  volun- 
tarily quitting  the  service,  or  to  one  who  is  dis- 
charged. In  any  case  the  worker  cannot  insist 
upon  consideration  as  a  matter  of  right.  It  may 
be  noted  in  passing,  moreover,  that  any  disposi- 
tion toward  greater  liberality  than  the  rules  pre- 


"DISCRETIONARY"  TYPE  85 

scribe  carries  with  it  the  danger  of  impairing  the 
jSnancial  stability  of  the  scheme. 

Furthermore,  while  in  some  cases  the  interpre- 
tation of  the  plan  is  more  liberal  than  the  plan 
itself,  in  other  cases  plans  have  been  arbitrarily 
changed  in  such  way  as  greatly  to  limit  the  pen- 
sion benefits.^ 

In  spite  of  the  grave  objections  raised  against 
them,  "discretionary"  pension  systems  are  in 
many  cases  to  be  regarded  as  a  sincere  attempt  to 
solve  one  of  the  most  complex  problems  in  mod- 
em industrial  economics.  That  they  have  not 
solved  it  completely  or  satisfactorily  is  no  occa- 
sion for  wholesale  denunciation  of  their  authors. 
Nevertheless,  in  view  of  the  numerous  objections 
to  such  systems,  and  particularly  their  failure  to 
place  the  pension  benefit  on  a  definite  contractual 
basis,  their  ready  liability  to  abuse,  their  inade- 
quacy as  a  means  of  meeting  the  superannuation 
problem,  their  great  danger  of  financial  shipwreck, 
it  is  clearly  incumbent  upon  an  employer  about 
to  inaugurate  a  retirement  system  to  endeavor  in 
every  practical  way  to  devise  some  method  which 
will  more  nearly  approach  an  ideal  plan. 

In  this  connection,  the  following  comment  is 
pertinent: 

'  In  this  connection  see  p.  167. 


86         INDUSTRIAL  PENSION  SYSTEMS 

"It  may  be  concluded  that  the  efforts  which 
industrial  corporations  are  making  for  the  relief 
of  old  age  dependency,  in  view  of  their  paucity 
and  variety,  do  not  give  satisfactory  ground  of 
hope  that  the  ultimate  solution  of  the  problem 
can  be  reached  in  this  way.  At  best  their  efforts 
are  a  makeshift;  and  their  chief  value  is  that  of 
a  guideboard  along  the  roadway  of  the  ultimate 
happy  destiny  of  the  army  of  American  toilers."  ^ 

*Lee  Welling  Squier.    "Old  Age  Dependency  in  the  United 
States,"  p.  108. 


CHAPTER  III 

non-contributory    pension    systems    of    the 
"limited- contractual"  type 

Under  non-contributory  pension  systems  des- 
ignated in  this  discussion  as  of  the  "limited- 
contractual"  type,  the  right  to  receive  a  benefit 
where  the  worker  has  fulfilled  the  conditions  of 
the  plan  and  has  entered  upon  the  pension  roll 
is  definitely  recognized,  and  a  pension  once 
granted  ordinarily  cannot  be  discontinued — at 
least  without  provision  for  meeting  any  rights 
accrued  by  reason  of  the  service  rendered. 

Ordinarily,  however,  no  right  is  recognized  in 
plans  of  this  type  until  the  worker  has  actually 
gone  upon  the  pension  roll.  In  practically  all 
other  respects,  such  so-called  "limited-contrac- 
tual" systems  as  actually  operative  at  the  present 
time  are  similar  to  plans  of  a  "discretionary" 
character.  They  often  reserve  a  wide  measure  of 
discretion  to  the  employer  as,  for  instance,  the 
right  to  discontinue  a  pension  in  case  of  "gross 
misconduct"  or  even  in  case  of  acts  "prejudicial 
to  the  interests  of  the  Company." 

87 


88         INDUSTRIAL  PENSION  SYSTEMS 

Typical  provisions  in  pension  plans  of  this  sort 
are  as  follows: 

"When  once  an  annuity  has  accrued  and  been 
granted  as  a  regular  allowance,  it  will  be  con- 
tinued for  the  life  of  the  annuitant,  subject,  how- 
ever, to  the  provisions  of  this  Plan,  as  it  is  in 
effect  at  the  time  such  annuity  is  granted."  ^ 

"The  Company  reserves  its  right  and  privilege 
to  discharge  at  any  time  any  officer,  agent,  or 
employee  as  the  interests  of  the  Company  may 
in  its  judgment  require,  without  incurring  any 
liability  because  of  any  pension  not  actually 
awarded;  and  also  reserves  its  right  to  amend, 
alter,  or  repeal  at  any  time  these  Regulations  or 
any  of  them  as  regards  aU  persons  who  might 
otherwise  become  entitled  to  claim  thereafter  an 
award  of  pension  thereunder,  but  not  so  as  to 
affect  the  right  of  any  person  to  whom  a  Service 
Pension  shall  have  been  awarded,  to  receive  all 
payments  of  the  same  promptly  and  in  full."  ^ 

In  one  plan  of  this  type  provision  was  made,  in 
case  the  scheme  was  abandoned,  to  transfer  the 
Pension  Fund  to  a  trustee,  or  to  purchase  annui- 
ties from  an  insurance  company,  for  all  persons 
to  whom  pensions  had  been  awarded,  in  amounts 
equal  to  such  pensions. 

These  illustrative  clauses  show  that  the  con- 
tractual obligation  often  is  of  a  very  limited  char- 
acter.   Moreover,  where  companies  establish  dis- 

*  Standard  Oil  Company  of  New  Jersey  Plan. 

'  Westinghouse  Electric  &  Manufacturing  Company  Plan. 


"LIMITED-CONTRACTUAL"  TYPE         89 

tinct  funds  segregated  from  the  general  funds  of 
the  corporation,  it  is  sometimes  provided  that  theJ 
pensioner  shall  have  no  claim  on  the  company 
itself,  in  case  the  fund  is  exhausted.  While  the 
creation  of  a  fund  may  really  be  an  additional 
safeguard  for  the  pensioner,  such  a  stipulation' 
obviously  involves  a  limitation  of  the  company's 
contractual  liability. 

The  contractual  type  of  non-contributory  pen-^ 
sion  system  is  not  common.  The  recognition  of 
a  definite  financial  obligation  is  a  burden  which 
many  establishments  are  unwilling  or  feel  unable 
to  assume.  Of  eighty-seven  non-contributory 
systems  in  industrial  establishments  examined  in 
the  course  of  this  investigation,  only  twenty- 
seven  w^ere  of  the  contractual  type. 

Complete  acceptance  of  the  contractual  prin- 
ciple would  require  that  a  payment  should  be 
made  to  employees  quitting  the  service,  or  dis- 
charged, before  reaching  the  retirement  age,  such 
payments  to  represent  the  net  accrued  value  of 
contributions  up  to  that  time.  Such  a  payment 
is  often  referred  to  as  a  "withdrawal  benefit"  or 
"return  of  contributions,"  but  may  better  be 
described  as  a  "withdrawal  equity,"  since  it  is 
supposed  to  cover  a  right  accrued  because  of 
service  rendered,  and  since  in  reality  it  is  in  lieu 
of  an  expected  benefit.    The  inclusion  of  such  a 


90         INDUSTRIAL  PENSION  SYSTEMS 

provision  adds  very  considerably  to  the  cost  of 
a  pension  plan.  In  addition,  there  is  a  general 
unwillingness  on  the  part  of  employers  to  pay 
such  "withdrawal  equities"  to  workers  who  are 
separated  from  the  service,  prior  to  their  super- 
annuation, either  by  their  own  volition,  or  by, 
dismissal.  A  further  argument  sometimes  ad- 
vanced against  such  a  withdrawal  equity  is  that 
it  may  actually  place  an  incentive  before  the  em- 
ployee to  quit  the  service  in  order  to  get  the 
accumulated  value  of  his  equity.^  This,  it  is 
argued,  not  only  tends  to  injure  the  morale  of  the 
service,  but  is  likely  to  lead  to  the  foolish  dissi- 
pation of  the  proceeds  by  the  recipient. 

While  these  objections  are  entitled  to  consid- 
eration, nevertheless,  to  the  extent  that  the 
principle  of  deferred  pay  is  actually  operative,  it 
is  difficult  to  escape  the  conclusion  that  where  a 
formal  pension  system  is  in  effect,  workers  who 
have  completed  a  substantial  period  of  service  are 
entitled  to  such  a  w^ithdrawal  equity,  even  though 
contributions  have  been  made  in  part,  or  entirely, 
by  the  employer. 

*Such  an  objection,  it  may  be  noted,  was  raised  by  the 
National  Civil  Service  Reform  League,  as  follows:  "Any 
retirement  scheme  which  provides  for  refunds  is  very  objec- 
tionable, because  it  puts  a  cash  premium  upon  resignation  and 
offers  a  great  temptation  to  leave  the  service  to  those  still 
young  and  capable  enough  to  get  outside  employment."  Nat'l 
Civil  Service  Reform  League.  "Superannuation  in  the  Civil 
Service,"  N.  Y.,  1906. 


"LIMITED-CONTRACTUAL"  TYPE         91 

Comparatively  few  pension  authorities  go  so 
far  as  to  insist  upon  this  in  the  case  of  non- 
contributory  schemes  and  even  under  contribu- 
tory plans  it  is  not  customary  for  a  worker  who 
becomes  separated  from  the  service  before  reach- 
ing the  retirement  age  to  receive  any  part  of  the 
employer's  contribution.^ 

Unless  provision  is  made  for  at  least  some 
withdrawal  equity  in  the  case  of  separation,  for 
workers  who  have  rendered  a  considerable  length 
of  service,  the  non-contributory  system  of  the 
"limited  contractual"  type  is  open  to  the  serious 
objection  that  it  does  nothing  for  the  considerable 
number  of  workers  who,  though  spending  a  large 
portion  of  their  productive  lifetime  with  a  given 
establishment,  do  not  continue  until  the  retire- 
ment age.  In  so  far  as  the  deferred-pay  principle 
is  operative,  a  non-contributory  pension  system 
of  the  "limited  contractual"  type  thus  involves 
the  tontine  feature,  by  which  many  lose  and  only 
a  few  win.  It  is  paternalistic;  it  can  easily  be 
abused  for  disciplinary  purposes;  it  tends  in  gen- 
eral to  discourage  habits  of  thrift.  Furthermore, 
unless  the  worker  is  made  to  feel  that  the  pension, 
or  the  withdrawal  benefit,  has  been  earned  by 
him  as  part  of  his  compensation,  he  is  in  effect 

*  In  this  connection  see  p.  207. 


92         INDUSTRIAL  PENSION  SYSTEMS 

accepting  it  as  a  form  of  bounty  from  his  em.- 
ployer. 

For  all  these  reasons,  non-contributory  systems 
of  the  ''limited-contractual"  type,  though  pos- 
sessing marked  advantages  over  an  ordinary  "dis- 
cretionary" system,  nevertheless  fall  far  short  of 
fulfilling  the  requirements  of  a  satisfactory  pen- 
sion plan. 

While  such  a  provision  for  withdrawal  equities 
would  remove  one  of  the  most  serious  objections 
to  such  a  system,  it  seems  reasonably  certain  that 
an  employer  who  is  disposed  to  accept  the  prin- 
ciple of  deferred  pay  to  the  extent  of  providing 
withdrawal  equities  through  surrender  of  his  own 
contributions  can  accomplish  better  results,  ap- 
parently at  less  cost,  and  surely  with  less  uncer- 
tainty, by  some  other  method  as,  for  instance,  a 
system  of  paid-up  annuities  discussed  in  Chap- 
ter V. 


CHAPTER  IV 

CONTRIBUTORY   PENSION   SYSTEMS 

Under  a  contributory  system,  as  already  ex- 
plained, part  of  the  cost  is  directly  borne  by  the 
employee,  usually  through  systematic  deductions 
from  his  pay  envelope.  In  some  private  systems 
of  this  type  the  employee  bears  one-half  the  cost. 
In  many  public  service  pension  systems  his  share 
is  smaller. 

A  more  vital  feature  of  contributory  systems  is 
that  they  recognize  a  definite  right  on  the  part  of 
the  workers,  not  only  to  a  retirement  benefit,  but 
also  to  a  withdrawal  equity  of  some  sort.  Usually; 
moreover,  a  death  benefit  is  provided.^ 

*In  all  contributory  systems,  experience  has  shown  that 
eventually  the  contributors  will  demand  four  things:  first,  that 
if  a  contributor  is  dismissed  or  resigns  voluntarily  before  the 
pensionable  age,  he  shall  be  paid  the  amount  of  his  total 
contributions,  with  interest;  second,  that  if  a  contributor  be- 
comes disabled  before  the  pensionable  age,  he  shall  receive 
either  a  full  or  a  proportionate  pension;  third,  that  if  he  dies 
before  retirement,  his  estate  shall  receive  the  amount  of  his 
total  contribution,  with  interest,  or  even  the  amount  of  both 
his  and  his  employer's  contribution,  with  interest;  fourth,  that 
if  he  retires  upon  a  pension,  but  dies  before  the  total  amount 
of  his  pension  receipts  equals  the  amount  of  his  total  contri- 
bution, with  interest,  his  estate  shall  receive  the  balance. 
(Carnegie  Foundation  for  the  Advancement  of  Teaching. 
Seventh  Annual  Report  of  the  President,  p.  61.) 

93 


94         INDUSTRIAL  PENSION  SYSTEMS 

Wherever  there  is  reasonable  ground  for  the 
belief  that  a  contributory  system  will  work,  there 
are  other  arguments  in  its  favor  as  against  a  non- 
contributory  system.  A  contributory  system  is 
far  less  paternalistic;  moreover,  it  tends  to  em- 
phasize the  value  of  thrift  and  presumably  to 
encourage  habits  of  thrift.  It  may  also  tend  to 
reduce  the  financial  burden  of  the  employer,  but 
this  cannot  be  laid  down  as  certain,  since  the  fact 
that  employees  contribute  may  lead  them  to  de- 
mand a  more  liberal  plan  than  the  employer 
would  adopt  if  he  financed  it  alone. 

Most  disinterested  students  of  pension  prob- 
lems have  been  strongly  in  favor  of  the  contribu- 
tory principle,  at  least  in  the  public  service. 
Representative  statements  by  some  of  these 
writers  follow. 

Henry  S.  Pritchett,  of  the  Carnegie  Founda- 
tion: 

"Both  the  logic  of  facts  and  the  logic  of  events 
point  conclusively  in  the  direction  of  contributory 
pension  systems.  .  .  .  Such  a  contributory  plan 
has  all  the  advantages  that  are  lacking  in  straight 
pension  systems.  It  encourages  thrift;  it  ensures 
ultimate  payment  of  obligations  by  contract;  it 
affords  protection  to  the  employee  and  his  family; 
it  provides  a  pension  which  the  employee  can  feel 
is  not  only  earned  by  long  service  but  is  his  own 
by  purchase;  and,  finally^  it  brings  the  employer 


CONTRIBUTORY  PENSION  SYSTEMS      95 

and  employee  into  mutual  relations  and  gives 
each  a  more  personal  interest  and  confidence  in 
the  other.  Where  the  number  of  employees  is 
large  enough,  such  a  plan,  after  it  has  been 
launched  on  a  sound  actuarial  basis,  may  be  oper- 
ated by  individual  firms;  where  the  number  is 
small,  arrangements  may  be  made  with  insurance 
companies  that  are  undertaking  group  insur- 
ance of  the  character  described  in  increasing  num- 
bers." 1 

Lee  Welling  Squier: 

"It  is  urged  that,  in  this  country  especially, 
every  man  is  the  'architect  of  his  own  fortune'; 
that  the  provision  against  want  at  any  period  in 
life  is  an  individual  obligation;  .  .  .  that  any 
hope  of  old  age  relief  from  want  which  is  not 
based  upon  individual  thrift,  economy,  and  fore- 
sight decreases  efiiciency,  independence,  and  man- 
liness; that  it  is  an  imposition  on  the  general  body 
of  our  industrial,  thrifty  population  and  an 
unnecessary  and  unwarranted  addition  to  the 
already  heavy  burdens  of  the  taxpayers  to  permit 
the  shiftless,  lazy,  and  improvident  to  expect  and 
rely  on  protection  against  want  which  they  them- 
selves have  not  secured  by  their  own  prescience 
and  determination."  - 

Paul  Studensky,  New  Jersey  Bureau  of  State 
Research,  a  well-known  writer  on  pension  prob- 
lems: * 

*The  Carnegie  Foundation  for  the  Advancement  of  Teach- 
ing:   Eleventh  Annual  Report  of  the  President,  pp.  118-119. 

^"Old  Age  Dependency  in  the  United  States,"  p.  262. 

'"The  Pension  Problem  and  the  Philosophy  of  Contribu- 
tions," pp.  17-18. 


96         INDUSTRIAL  PENSION  SYSTEMS 

1.  "It  is  a  compromise  between  the  foregoing 
two  extreme  systems.  ('Wholly  contributory' 
and  non-contributory  systems.)  ^ 

2.  "It  harmoniously  combines  with  social  in- 
surance and  with  its  principle  that  every  worker 
must  participate  in  the  cost  of  his  protection. 

3.  "It  is  a  joint  undertaking  which  involves 
mutual  benefits  and  a  two-fold  purpose:  on  the 
one  hand,  insuring  the  employees  and  their  de- 
pendents against  want  in  old  age,  disability, 
death,  and — to  some  extent — resignation  and  dis- 
missal; on  the  other  hand,  facilitating  the  elim- 
ination of  the  inefficient  from  the  service  and 
promoting  an  esprit  de  corps. 

4.  "It  tends  to  give  both  sides  an  equal  voice 
in  management. 

5.  "It  promotes  a  clear  distinction  between 
pensions  and  wages,  each  side  knowing  what  it 
pays;  it  is  not  intended  either  to  reduce  or  in- 
crease the  wages,  does  not  depress  the  wage,  and 
does  not  become  a  'deferred  pay.' 

6.  "It  makes  possible  the  establishment  of 
a  financially  sound  system,  the  cost  of  which 
amounts  to  ten  or  eleven  per  cent  or  even  more, 
by  dividing  the  cost  and  requiring  the  employees 
to  pay  five  or  six  per  cent,  as  is  being  done  all  over 
the  world.^ 

7.  "Concurrently  with  its  adoption  for  both 
present   employees   and    new   entrants,    the   old 

^The  designation  "wholly  contributory"  in  this  case  meant 
a  system  financed  entirelj^  by  contributions  from  employees. 

^This  estimate  of  cost  is  applicable  to  public  service  rather 
than  to  private  industry. 


CONTRIBUTORY  PENSION  SYSTEMS      97 

'vested  rights'   and   privileges  are  being  swept 
away. 

8.  "It  is  a  system  which  progresses  in  har- 
mony with  social  evolution,  while  the  other  sys- 
tems are  dying,  and  it  expresses  the  growing 
mutual  responsibilities  which  make  for  a  greater 
democracy  and  a  happier  community." 

Deferred-Pay  Issue  under  Contributory  Pension 
Plans 

One  important  argument  advanced  in  favor  of 
the  contributory  plan  is  that  it  meets,  at  least 
in  part,  the  issue  of  deferred  pay.  In  the  case 
of  contributory  pension  systems,  the  amounts  con- 
tributed by  the  employee  obviously  are,  in  a 
technical  sense,  deferred  pay,  since  they  are  taken 
out  of  his  current  wage  to  be  returned  in  one  form 
or  another  at  a  later  date.  It  by  no  means  fol- 
lows, however,  that  the  employee's  contributions 
are  deferred  pay  in  the  sense  that  they  reduce  the 
current  rate  of  compensation.  As  deductions 
from  his  current  pay  they  do,  of  course,  reduce 
the  amount  of  wages  which  he  receives  at  the 
time.  But  there  seems  no  reason  to  assume  that 
they  could  reduce  the  rate  of  wages.  Instead, 
under  a  contributory  system  the  contributions 
of  the  employee  are,  essentially,  savings  invested 
in  the  purchase  of  an  annuity.  As  one  writer  has 
said : 


98         INDUSTRIAL  PENSION  SYSTEMS 

"The  employees'  contributions  could  no  more 
be  viewed  as  a  reduction  of  their  wage  than  could 
any  savings  which  they  add  to  their  bank  ac- 
counts. ...  Of  course,  the  contribution  slightly 
limits  one's  immediate  use  of  the  wage,  but  it  does 
so  in  order  to  insure  the  employee  some  satisfac- 
tion of  his  wants  in  the  future. 

"It  is,  therefore,  not  a  reduction  of  the  wage, 
but  a  redistribution  of  it  between  immediate  and 
future  wants."  ^ 

It  has,  indeed,  been  contended  that  a  contribu- 
tory system  tends  to  raise  the  current  rate  of 
wages,  on  the  ground  that  workers  agreeing  to 
make  regular  contributions  would  endeavor  to 
secure  an  increase  in  their  rate  of  compensation 
sufficient  to  offset  these. 

Whether,  under  a  contributory  system,  the  con- 
tribution of  the  employer  tends  to  reduce  the  rate 
of  wages  equally  as  in  the  case  of  a  non-contribu- 
tory system,  cannot  be  definitely  established.  It 
would  be  easy  to  argue  that  the  effect  would  be 
the  same  in  one  case  as  in  the  other.  Some 
students  of  pension  problems,  however,  instead 
of  regarding  the  employer's  contribution  under  a 
contributory  system  as  taken  out  of  the  worker's 
wage,  look  upon  it  as  an  established  payment  in 
return  for  which  he  receives  definite  advantages 

^Paul    Studensky.    "The    Pension   Problem    and   the   Phi- 
losophy of  Contributions,"  p.  14. 


CONTRIBUTORY  PENSION  SYSTEMS      99 

in  the  form  of  better  service,  or  in  facilitating  the 
removal  of  inefficient  workers.  On  this  point  the 
writer  just  quoted  has  said: 

"So  long  as  the  employee  remains  in  the  em- 
ployer's service  the  two  help  the  realization  of 
each  other's  purpose,  for  if  the  government  by 
adding  a  'pension'  to  his  'annuity'  thereby  doubles 
his  protection,  the  employee,  on  the  other  hand, 
by  adding  his  'annuity'  to  the  employer's  'pen- 
sion' thereby  doubles  the  facilities  of  the  govern- 
ment in  eliminating  the  inefficient  and  improving 
the  service  in  general.  A  mutual  relationship  of 
tremendous  social  consequence  is  thus  established 
between  the  two."  ^ 

It  might  seem  that  this  argument  would  be 
equally  applicable  to  non-contributory  systems. 
This  view  overlooks  the  important  fact  that  the 
ordinary  non-contributory  system  recognizes  no 
contractual  right.  If  the  employer  is  not  willing 
to  put  the  pension  on  a  definite  contractual  basis, 
he  cannot  reasonably  expect,  as  a  direct  result  of 
a  pension  system,  that  cooperation  from  the 
worker  which  is  essential  to  increased  efficiency 
of  service. 

As  a  rule  contributory  systems  provide  for  the 
return  of  the  employee's  contribution  in  the  event 
of  his  separation  from  the  service  prior  to  reach- 

*Paul    Studensky.    "The    Pension    Problem    and    the    Phi- 
losophy of  Contributions,"  p.  14. 


100       INDUSTRIAL  PENSION  SYSTEMS 

ing  the  retirement  age.  Few,  if  any,  private  pen- 
sion plans  provide  for  return  of  the  employer's 
contribution  in  such  cases.  It  is  the  opinion  of 
some  leading  students  of  the  pension  problem, 
however,  that  the  employee  separated  from  the 
service  prior  to  reaching  the  retirement  age  should 
receive  the  net  amount  of  not  only  his  own,  but 
of  the  employer's  contribution  as  well.^ 

It  may  be  noted  that  one  of  the  leading  actu- 
aries of  Great  Britain,  James  J.  M'Lauchlan,  in 
outlining  what  he  termed  a  "model  fund,"  pro- 
vided for  the  return  of  the  employer's  contribu- 
tion in  the  event  of  the  death  of  an  employee,  but 
not  in  the  event  of  his  withdrawal  from  the 
service.  His  model  fund  included  the  following 
benefits:  ^ 

(1)  "A  pension  on  retirement  at  any  time  after 
reaching  age  sixty ; 

(2)  "A  pension  of  a  reduced  amount  corre- 
sponding to  length  of  membership,  on  retirement 
in  impaired  health  before  reaching  age  sixty, 
these  pensions  to  be  at  a  uniform  rate  per  cent  per 
annum,  on  the  average  salary  received  during  the 
whole  period  of  membership ; 

*  Meriam  is  one  of  the  few  writers  who  have  advocated  such 
return  of  the  employer's  contribution  in  the  case  of  contribu- 
tory systems.  See  his  "Principles  Governing  the  Retirement 
of  Public  Employees,"  pp.  419-420. 

^  James  J.  M'Lauchlan.  "The  Fundamental  Principles  of 
Pension  Funds":  Transactions  of  the  Faculty  of  Actuaries, 
Vol.  IV,  No.  41. 


CONTRIBUTORY  PENSION  SYSTEMS    101 

(3)  "A  return  of  the  employee's  own  contribu- 
tions without  interest,  on  withdrawal  from  the 
Fund  in  consequence  of  leaving  the  company's 
service; 

(4)  "A  return  of  his  own  contributions  and  the 
corresponding  contributions  of  the  company  with- 
out interest,  in  the  event  of  death  before  becom- 
ing entitled  to  a  pension." 

Contributory  Pension  Systems  and  Thrift 

An  objection  often  raised  against  non-contribu- 
tory pensions,  as  already  shown,  is  their  failure 
to  stimulate  individual  thrift.  In  this  respect  a 
contributory  system  has  a  decided  advantage.  In 
so  far  as  the  employee's  contribution  is  concerned, 
this  is  essentially  a  saving  and  nothing  else. 
Moreover,  it  is  a  systematic  saving.  In  addition 
to  the  amounts  actually  set  aside,  such  systematic 
contributions  may  encourage  the  worker  to  fur- 
ther saving  outside  of  the  pension  plan. 

The  effect  of  a  contributory  pension  system  on 
thrift  has  been  described  in  a  report  of  the  Car- 
negie Foundation  as  follows: 

"Thrift  is  a  habit,  a  mental  attitude,  that  grows 
with  the  opportunities  for  its  exercise  and  the 
experience  of  its  benefits.  The  argument  that  it 
would  be  wiser  to  increase  wages  and  leave  to  the 
individual  the  provision  of  his  own  protection  is 
valid  for  those  who  already  possess  the  habit  of 
thrift,  but  breaks  down  for  the  large  majority 


102        INDUSTRIAL  PENSION  SYSTEMS 

in  not  providing  help  for  those  who  may  need  it 
most,  including  the  man  who  suffers  early  disa- 
bility. A  contributory  plan  offers  exactly  the 
desirable  opportunity  for  developing  this  habit, 
and  has  the  further  value  of  promoting  a  sense  of 
cooperation  and  mutual  responsibility.  It  fur- 
nishes the  possibility  of  saving  and  investment 
that  is  not  open  in  the  ordinary  commercial  chan- 
nels for  men  on  small  fixed  incomes."  ^ 

It  is  furthermore  the  opinion  of  many  students 
of  pension  problems  that  the  contributory  prin- 
ciple gives  a  pension  system  a  far  greater  appeal, 
on  the  ground  that  those  things  are  most  cher- 
ished which  involve  personal  sacrifice  or  interest. 
This  view  is  held  not  only  by  academic  students, 
but  by  business  executives,  several  of  whom  after 
trying  one  kind  of  so-called  welfare  work  after 
another  have  stated  that  they  are  satisfied  that 
little  practical  benefit  is  derived  from  the  mere 
handing  out  of  gratuities. 

Progress  of  the  Contributory  Principle 

Outside  of  the  field  of  private  industry  the  con- 
tributory principle  has  steadily  gained  prestige. 
Most  state  commissions  which  have  studied  the 
pension  problem  have  favored  the  contributory; 

*  Clyde  Furst  and  I.  L.  Kandel.  "Pensions  for  Public  School 
Teachers":  The  Carnegie  Foundation  for  the  Advancement 
of  Teaching.    Bulletin  No.  12,  p.  7. 


CONTRIBUTORY  PENSION  SYSTEMS    103 

plan.  The  First  ^  Massachusetts  Commission 
on  Pensions  emphatically  condemned  the  non- 
contributory  system  for  state  employees,  and  with 
equal  emphasis  recommended  the  adoption  of  a 
contributory  system,  which  it  regarded  as  essen- 
tially a  form  of  assisted  savings.  The  Illinois 
Pension  Laws  Commission  also  endorsed  the  con- 
tributory principle,  as  did  the  Wisconsin  Com- 
mission. The  Pennsylvania  Commission  on  Old 
Age  Pensions,  it  is  true,  took  a  position  in  favor 
of  the  non-contributory  system,  but  one  member 
of  that  Commission  was  an  earnest  advocate  of 
general  old  age  pensions,  and  there  is  a  strong 
suggestion  in  the  report  that  the  opposition  to  a 
contributory  system  was  partly  a  reflection  of  a 
fear  that  this  might  tend  to  prejudice  the  adop- 
tion of  a  general  free  old  age  pension. 

The  pension  system  introduced  by  the  United 
States  Government  in  1920  is  of  the  contributory 
type,  as  are  many  of  those  in  operation  in  vari- 
ous state  and  municipal  services.  The  contribu- 
tory system  is  likewise  generally  favored  in  public 
service  in  foreign  countries. 

One  writer  has  commented  upon  this  drift 
toward  the  contributory  system,  as  follows:  ^ 

'See  footnote  p.  30. 

^Paul  Stiidensky.  "The  Pension  Problem  and  the  Phk 
losophy  of  Contributions,"  p.  13. 


104       INDUSTRIAL  PENSION  SYSTEMS 

"A  careful  examination  of  the  pension  move- 
ment abroad  and  in  this  country  shows  that  the 
arguments  against  non-contributory  benefits  are 
constantly  gaining  in  weight  and  that  the  gov- 
ernment, the  employees,  and  the  public  at  large 
are  looking  with  increasing  disfavor  upon  non- 
contributory  systems.  The  tendency  of  the  entire 
movement  leads  towards  its  gradual  abandon- 
ment." 

In  the  case  of  public  service  pension  systems, 
the  contributory  principle  is  making  such  prog- 
ress that  it  promises  to  become  practically  exclu- 
sive in  this  field.  The  contributory  system  tends 
to  meet  the  objection  of  the  taxpayer  that  public 
service  employees  otherwise  are  constituted  into 
an  especially  privileged  class.  A  further  practical 
consideration  is  that  the  direct  cost  to  the  State 
or  the  municipality  is  reduced. 

In  private  industry  the  contributory  principle 
has  made  slower  progress,  although  there  is  some 
evidence  that  here,  too,  it  is  gaining  in  favor. ^ 

As  yet,  however,  contributory  systems  in  pri- 
vate industry  are  not  general.  They  are  fairly 
common  in  the  case  of  banking  institutions  which 

^  Thus  William  R.  Willcox,  Chairman  of  the  Pension  Depart- 
ment of  the  National  Civic  Federation,  stated  on  this  point: 

"We  have  verified  information  in  which  it  had  been  repre- 
sented to  us  that  the  recent  tendencj^  of  private  enterprises 
throughout  the  world,  after  a  wide  period  of  experience,  has 
been  to  turn  from  the  straight  to  the  contributory  system,  the 
tax  on  the  industry  under  the  former  having  become  onerous." 
(Address  at  the  Sixteenth  Annual  Meeting  of  the  National 
Civic  Federation,  Washington,  D.  C,  January,  1916.) 


CONTRIBUTORY  PENSION  SYSTEMS    105 

have  formal  pension  systems,  but  not  among 
manufacturing  establishments.  Of  ninety-three 
plans  listed  in  the  Appendix  only  six  are  of  the 
contributory  type.  Broadly  speaking,  it  appears 
that  a  contributory  plan  is  best  adapted  to  em- 
ployees of  a  high  order  of  intelligence,  who 
receive  relatively  good  pay  and  who  appreciate 
the  advantage  of  providing  against  old  age,  and 
who  look  upon  the  system  as  a  form  of  old  age 
endowment  insurance. 

Disadvantages  of  the  Contributory  System 

Despite  the  strong  a  priori  arguments  in  favor 
of  a  contributory  system,  it  is,  in  the  case  of  pri- 
vate industry,  confronted  with  numerous  practical 
objections.  For  some  industrial  establishments 
these  objections  may  be  fatal  to  the  success  of 
the  plan. 

In  the  first  place,  experience  has  demonstrated 
that  a  contributory  system,  in  order  to  be  suc- 
cessful, usually  must  be  compulsory.  The  natu- 
ral inclination  of  members  to  let  payments  lapse 
is  so  great  that  their  good  will  and  self-interest 
cannot  be  depended  upon  to  keep  the  plan  finan- 
cially solvent.  Payments  must  be  regularly  kept 
up,  for  it  is  only  by  the  compounding  of  pay- 
ments in  early  years  that  the  pension  obligations 
of  later  years  can  be  met. 


106       INDUSTRIAL  PENSION  SYSTEMS 

Again,  where  labor  turnover  is  high,  the  admin- 
istrative burden  of  maintaining  a  compulsory 
system  is  a  serious  consideration  for  employers. 
Again,  with  certain  classes  or  racial  types  of 
workers  the  task  of  inaugurating  a  compulsory 
system  is  so  great  as  to  discourage  the  employer. 
The  introduction  of  a  compulsory  system  ordi- 
narily will  be  difficult  where  women  constitute  an 
important  proportion  of  the  working  force,  since 
comparatively  few  of  these  expect  to  continue  in 
the  service  until  they  have  reached  old  age.  Still 
again,  there  may  be  legal  obstacles  in  the  way. 
Thus,  the  laws  of  some  states  do  not  permit  of 
enforced  deductions  from  the  employee's  wages, 
in  order  to  meet  contributions  to  the  fund. 

Under  the  contributory  system  there  is  likely 
to  be  a  demand  for  joint  management  of  the 
scheme  by  employer  and  employee. 

"A  contributory  pension  system  maintained  by 
joint  cooperation  of  an  industrial  organization 
and  its  employees  assumes  at  once  a  contractual 
relation.  In  such  a  case  common  justice  requires 
that  contributing  employees  shall  have  a  hand  in 
the  management,  and  that  all  contributions  to 
persons  leaving  the  service  be  returned  with  fair 
interest  added.  Corporations  have  been  slow  to 
accept  these  conditions,  not  only  on  account  of 
the  uncertain  financial  load  involved  in  the  con- 
tributory pensions,  but  also  on  account  of  the 


CONTRIBUTORY  PENSION  SYSTEMS     107 

hesitation  of  most  organizations  to  limit  their  own 
independence  of  action."  ^ 

Many  employers  regard  this  as  objectionable. 
Others,  however,  feel  that  the  cooperation  of 
employees  is  a  decided  advantage,  and  even 
essential.  An  official  of  a  large  company  which 
has  a  contributory  system  in  successful  operation 
stated  that  the  satisfactory  results  were  largely 
due  to  the  fact  that  the  employees  directly  par- 
ticipated in  the  administration  of  the  scheme. 

The  contributory  system,  as  already  shown, 
places  definite  contractual  obligations  upon  the 
employer.  This  is  not  an  objection,  if  the  bene- 
fits are  fair.  However,  under  a  contributory 
system,  especially  if  the  employer  bears  a  large 
part  of  the  cost,  there  is  danger  that  the  workers 
will  insist  on  more  liberal  benefits  as  time  goes  on. 

Conclusions  as  to  Contributory  Pension  Systems 

From  this  brief  analysis  of  contributory  pension 
systems  it  may  fairly  be  asserted : 

1.  That  under  a  contributory  system  the 
worker's  contribution  clearly  cannot  be  regarded 
as  deferred  pay  in  the  sense  of  depressing  the 
current  rate  of  wages  and,  furthermore,  that  the 
employer's  contribution  may  not  have  the  same 

*  Carnegie   Foundation   for  the   Advancement   of  Teaching. 
Seventh  Annual  Report  of  the  President,  p.  59. 


108       INDUSTRIAL  PENSION  SYSTEMS 

tendency  to  depress  the  rate  of  wages  as  it  does 
in  the  case  of  a  "discretionary"  system.  Indeed, 
the  contributory  system  may  tend  to  force  an 
increase  in  money  wages  sufficient  to  offset  the 
worker's  contribution. 

2.  That  a  contributory  system,  if  on  a  sound 
actuarial  basis,  with  provision  for  the  return  of 
contributions  in  the  event  of  death,  resignation, 
or  dismissal,  is  largely  free  from  the  objections 
lying  against  the  tontine  principle. 

3.  That  a  contributory  pension  system  is  com- 
ing to  be  regarded  as  virtually  a  joint  savings 
scheme,  under  which  the  employee  benefits 
through  systematic  provision  for  old  age,  while 
the  employer  benefits  through  greater  oppor- 
tunity to  retire  superannuated  workers,  and  in 
other  ways  to  improve  the  efficiency  of  his  work- 
ing force. 

4.  That  the  system  provides  a  direct  incentive 
to  thrift,  and  that  the  mere  fact  that  the  worker 
shares  in  the  expense  tends  to  increase  his  inter- 
est in  the  plan,  while  at  the  same  time  reducing 
the  element  of  paternalism. 

5.  That  the  contributory  system  nevertheless 
has  numerous  practical  disadvantages.  To  in- 
sure its  own  solvency  it  ordinarily  must  be  com- 
pulsory. As  such,  it  is  likely  to  be  unfavorably 
regarded  by  the  worker,  although  not  necessarily 
so. 

6.  That  where  the  rate  of  labor  turnover  is 
heavy,  such  a  system  involves  a  greatly  increased 
administrative  burden,  while  the  frequent  return 


CONTRIBUTORY  PENSION  SYSTEMS     109 

of  contributions  to  withdrawing  members  may- 
impair  the  financial  stability  of  the  plan. 

7.  That  it  places  the  employer  under  definite 
financial  obligations  of  a  contractual  sort,  which 
necessitate  a  careful  administrative  supervision 
and  heavy  and  continuing  actuarial  expense. 

8.  That  it  practically  requires  participation  of 
the  workers  in  its  administration :  this  is  regarded 
by  some  employers  as  undesirable  and  as  likely 
to  lead  to  undue  pressure  for  increased  benefits. 

9.  That,  notwithstanding  these  disadvantages, 
the  contributory  system,  because  of  its  recogni- 
tion of  contractual  rights,  the  fact  that  in  a  large 
measure  it  meets  the  issue  of  deferred  pay,  and 
that  it  tends  to  place  part  of  the  responsibility 
for  providing  against  superannuation  upon  the 
individual,  is  distinctly  superior  to  an  ordinary 
"discretionary"  system  wherever  it  can  be  made 
practically  operative.  With  certain  classes  of 
workers  and  under  some  conditions,  however,  the 
practical  difficulties  inherent  in  the  contributory 
plan  in  the  case  of  industrial  establishments  may 
be  insuperable. 


CHAPTER  V 

CUMULATIVE   "SINGLE   PREMIUM"   ANNUITIES   AS  A 
SUBSTITUTE  FOR  PENSIONS 

In  contrast  with  the  various  types  of  pension 
systems  discussed  in  preceding  pages,  attention 
may  now  be  called  to  a  system  of  cumulative 
"single  premium"  annuities  of  small  amount,  issu- 
able year  by  year  as  a  form  of  service  bonus. 
Such  a  scheme  is  a  comparatively  new  develop- 
ment in  the  field  of  retirement  systems.  So  far 
as  knowTi,  it  has  as  yet  been  put  into  actual 
operation  among  wage  earners  in  only  a  single 
instance,^  and  the  insurance  companies  interested 
are  still  working  on  the  details  of  their  contracts.^ 
The  plan,  however,  meet-s  so  many  objections 
raised  against  pension  systems  that  it  seems 
worthy  of  most  careful  consideration  by  em- 
ployers who  are  interested  in  the  problem  of  re- 
tiring superannuated  or  incapacitated  employees. 

*  William  Edwin  Rudge,  Inc.,  New  York  City,  has  recently 
installed  such  a  system. 

"The  Metropolitan  Life  Insurance  Company  and  the 
Equitable  Life  Assurance  Society  of  the  U.  S.  appear  to  have 
given  chief  attention  to  such  an  annuity  system. 

110 


"SINGLE  PREMIUM"  ANNUITIES        111 

Features  of  the  Annuity  Plan 

In  brief,  the  plan  for  such  a  single  premium 
service-annuity  is  as  follows: 

Every  worker  who  has  completed  a  limited 
period  of  sen- ice  with  an  establishment  (say  three 
to  five  years,  roughly  covering  the  period  of 
initial  heavy  labor  turnover)  would,  for  each  addi- 
tional year,  receive  a  paid-up  annuity  policy 
assuring  him  an  income  of,  say,  $10  per  year, 
beginning  at  age  sixty-five.^ 

As  the  length  of  service  extended,  the  accumu- 
lation of  such  policies  would  gradually  build  up 
an  income  which  at  the  retirement  age  would  take 
the  place  of  a  pension.  Thus,  a  worker  who  re- 
ceived a  $10  policy  each  year  for  thirty  years 
would  be  assured  an  income  of  $300  per  year  on 
retirement;  those  remaining  for  a  shorter  period 
would  have  a  pro  rata  amount. 

There  would  be  no  conditions  attached  to  the 
issuance  of  a  policy  other  than  the  completion 
of  an  additional  year  of  service.^    The  policy 

*The  amount  of  the  annuity  and  the  age  limit  could,  of 
course,  be  varied  as  desired.  Furthermore,  provision  could  be 
made  for  commencing  annuities  in  advance  of  the  stipulated 
age,  or  postponing  them  beyond  it,  with  a  corresponding 
change  in  the  installments  of  the  annuity.  However,  if  the 
age  limit  is  lowered,  the  installments  of  the  annuity  will 
decline  in  much  more  rapid  ratio,  so  that  it  is  impracticable 
to  anticipate  the  retirement  age  more  than  a  very  few  years. 
(See   p.   216.) 

'  If  desired,  annuities  could,  of  course,  be  issued  to  cover  lesg 
than  a  full  year's  service. 


112        INDUSTRIAL  PENSION  SYSTEMS 

when  once  turned  over  to  the  worker  would  be 
absolutely  his  property  and  could  not  be  for- 
feited. 

The  annuity  policies  would  be  written  by  a 
strong  insurance  company,  so  that  ultimate  pay- 
ment would  not  depend  on  the  financial  condi- 
tion of  the  employer. 

While,  for  his  protection,  the  employer  could 
reserve  the  right  to  discontinue  the  arrangement 
at  the  close  of  any  year,  this  would  not  affect  any 
pohcies  already  issued.  Such  a  plan,  however, 
should  never  be  inaugurated  unless  the  employer 
has  satisfied  himself,  so  far  as  possible,  of  his 
ability  and  willingness  to  continue  it  for  an  in- 
definite period. 

Such  an  annuity  scheme,  while  accomplishing 
many  things  that  pensions  are  designed  to  accom- 
plish, is  sharply  differentiated  from  the  ordinary 
pension  system.  In  the  first  place,  the  payment 
is  on  a  contractual  basis  from  year  to  year.  The 
fundamental  basis  of  such  a  cumulative  annuity 
is  that  continuity  of  service  is  worth  special 
recognition  and  that  the  employer,  therefore,  is 
justified  in  paying  for  such  service  as  a  business 
proposition. 

The  prhnary  object  of  such  an  annuity  system 
would  be  to  maintain  efiSciency  by  providing  an 
equitable   method   of   dismissing   superannuated 


"SINGLE  PREMIUM"  ANNUITIES        113 

and  incapacitated  employees.  Provision  against 
superannuation,  although  a  vital  feature  of  the 
plan,  is  collateral  to  this  object  and  to  the  prin- 
ciple of  rewarding  special  length  of  service. 

A  chief  justification  of  such  a  system,  from  the 
employer's  standpoint,  is  that  workers  who  con- 
tinue beyond  a  given  limited  term  save  him  the 
expense  of  labor  turnover  and  also,  perhaps,  be- 
come increasingly  efl&cient.  At  the  same  time 
such  a  system  automatically  meets  the  problem 
of  superannuation,  approximately  pro  rata  with 
the  length  of  service  rendered  by  the  worker.  In 
the  case  of  workers  who  had  spent  practically 
their  entire  lifetime  in  the  employ  of  a  single 
establishment,  the  total  annuity  at  retirement 
would  be  the  equivalent  of  a  liberal  pension. 
General  Arguments  in  Favor  of  the  Annuity  Plan 

Among  the  advantages  urged  in  favor  of  such 
an  annuity  system  are  the  following: 

1.  It  is  a  business  proposition.  The  employer 
pays  for  what  he  gets:  The  worker  receives  com- 
pensation for  the  service  actually  rendered. 

2.  It  eliminates  the  objectionable  "discretion- 
ary" feature  of  many  pension  systems,  since  the 
annuity  policy  once  handed  the  worker  is  his  be- 
yond recall.  It,  therefore,  cannot  be  used  for 
disciplinary  purposes. 

3.  It  does  not  interfere  with  mobility  of  labor. 
The  worker  is  as  free  to  seek  another  position  as 


114       INDUSTRIAL  PENSION  SYSTEMS 

though  the  extra  compensation  were  paid  in  cash. 
If  he  were  separated  from  the  service  before  the 
end  of  any  given  year,  he  would  receive  no  policy 
for  that  year/  but  this  would  not  affect  policies 
issued  for  service  already  rendered.  However, 
precisely  because  this  service  annuity  is  thus  paid 
without  reservations,  it  should  bring  a  response 
from  the  worker  far  greater  than  would  ordinarily 
be  secured  under  a  pension  system  where  the  pen- 
sion promise  is  involved  in  many  uncertainties 
and,  moreover,  may  easily  be  distorted  into  a 
threat. 

4.  While  sharply  differentiated  from  a  pen- 
sion, the  annuity  may  provide  as  effectively  as  a 
pension  for  the  old  age  of  the  worker. 

5.  The  system  is  practically  relieved  of  any 
element  of  charity.  Payment  would  not  depend 
upon  the  necessities  of  the  worker,  but  would  be 
made  year  by  year  to  all  who  had  rendered  an 
additional  year's  service. 

6.  It  is  equitable  as  between  individuals. 
Those  workers  who  remain  with  the  company 
throughout  their  productive  lifetime  would  re- 
ceive the  largest  return.  Those  who  elected,  or 
who  were  forced,  to  leave  the  service,  would  secure 
recognition  in  proportion  to  the  number  of  years 
of  "annuity  service"  actually  rendered. 

7.  It  facilitates  removal  of  inefficient  workers 
approaching  superannuation  more  effectively 
than    does    a    pension    system.    As    previously 

*That  is,  on  the  plan  here  under  discussion.  It  would,  as 
already  noted,  be  possible  to  draw  the  plan  so  that  credit 
would  be  given  for  a  part  of  a  year's  service. 


"SINGLE  PREMIUM"  ANNUITIES        115 

pointed  out,  under  the  ordinary  pension  system  a 
humane  executive  often  is  tempted  to  continue 
workers  still  some  distance  from  the  retirement 
age,  even  though  they  have  become  ineflBcient, 
since  otherwise  they  might  completely  forfeit 
their  pension  benefit.  If,  however,  such  a  worker 
has  received  a  service  annuity  policy  for  each 
year  of  service  rendered,  his  superior  obviously 
need  have  less  compunction  about  dismissing  him 
when  he  is  no  longer  able  to  do  his  work 
efficiently. 

8.  The  system  protects  the  worker  against 
forfeiture  of  pension  benefits  in  the  event  of  dis- 
missal. The  policies  already  earned  are  actually 
in  the  worker's  possession.  Under  ordinary  pen- 
sion systems,  as  previously  explained,  an  unfair 
executive  may  dismiss  workers  nearing  the  retire- 
ment age  in  order  to  reduce  the  burden  on  the 
pension  fund.  Not  only  is  this  practice  unjust, 
but  it  is  almost  certain  to  nullify  much  of  the 
good  that  a  pension  system  might  otherwise  ac- 
complish. The  annuity  system,  therefore,  while 
facilitating  the  dismissal  of  workers  no  longer 
efficient,  puts  less  temptation  before  the  manage- 
ment to  dismiss  them  on  financial  grounds  than 
does  an  ordinary  pension  system.  It  might,  how- 
ever, be  found  desirable  to  discontinue  the  pur- 
chase of  such  policies  after  some  stated  age 
because  of  their  increasing  cost.^ 

9.  Since  the  annuity  policy  would  be  written 
by  a  strong  insurance  company,  the  worker  is 
completely  relieved  of  any  anxiety  as  to  the  re- 
sponsibility of  the  employer  or  his  continuance 

*  For  a  further  discussion  of  this  point,  see  pp.  123  and  124. 


116       INDUSTRIAL  PENSION  SYSTEMS 

in  business.  The  establishment  might  fail,  merge 
with  another  concern,  or  liquidate,  but  none  of 
these  events  would  affect  the  value  of  the  annuity 
policies  already  issued. 

10.  The  system  squarely  and  effectively  meets 
the  issue  of  deferred  pay.  While  it  is  desirable 
that  such  annuity  should  be  regarded  as  a  form 
of  service  bonus,  it  is  possible  that  on  a  non-con- 
tributory basis,  such  a  system,  because  of  its  com- 
parative certainty,  would  tend  even  more  than 
a  pension  system  to  assume  the  nature  of  de- 
ferred pay.  The  annuity  system,  however,  has 
the  great  merit  that,  to  the  extent  that  pay  is  so 
deferred,  its  eventual  return  to  the  worker  is 
guaranteed  year  by  year.^ 

11.  Tangible  evidence  of  the  benefit  is  brought 
annually  to  the  attention  of  the  worker,  thus  tend- 
ing to  increase  his  interest  and  confidence  in  the 
plan.  In  this  respect  the  annuity  system  has  a 
great  advantage  over  most  pension  systems. 

12.  Such  an  annuity  system  tends  directly  to 
encourage  thrift.  This  is  particularly  true  if  it 
is  on  a  contributory  basis. 

13.  The  system  can  be  made  contributory 
without  compulsion.     Defections  from  the  plan 

*To  assure  return  to  estates  of  members  dying  before  retire- 
ment, the  system  should  provide  a  death  benefit,  either  in  the 
policy  or  bj^  some  collateral  arrangement. 

It  should  be  noted  that  if  such  an  annuity  system  were  on 
a  contributory  basis,  the  workers  contributing  would  almost 
certainly  demand  a  death  benefit  provision.  In  the  opinion 
of  some,  as  noted  on  page  204,  this  could  best  be  handled  by 
a  separate  arrangement  like  group  insurance.  It  is  the 
opinion  of  some  authorities,  however,  that  such  an  annuity 
system  on  a  contributory  basis  would  require  a  death  benefit 
provision  in  the   annuity  contract  itself. 


"SINGLE  PREMIUM"  ANNUITIES        117 

by  any  one  individual  do  not  affect  the  value  of 
the  annuities  of  others.  It,  therefore,  has  a 
marked  advantage  in  this  respect  over  the  ordi- 
nary contributory  pension  plan,  which  might  be 
wrecked  by  any  considerable  number  of  with- 
drawals and  which,  for  this  reason,  usually  has 
to  be  on  a  compulsory  basis.  Moreover,  it  could 
easily  be  arranged  that  workers  who  so  desired 
could  purchase  additional  annuity  policies  on 
their  own  account,  in  any  year  or  years  that  they 
were  financially  able  to  do  this. 

14.  From  the  employer's  standpoint  the  an- 
nuity system  has  the  great  advantage  that  the 
cost  can  be  figured  much  more  accurately  than 
the  cost  of  a  pension  system,  and  that  no  further 
contractual  liabilities  are  inciu-red.  Each  year's 
arrangement  is  a  closed  and  completed  transac- 
tion. While  a  discontinuance  of  the  plan  is  to 
be  avoided,  if  possible,  nevertheless  if  it  is  un- 
avoidable the  employer  winding  up  the  plan  has 
no  long  distance  liabilities  confronting  him. 

15.  In  time  of  emergency  the  annuities  could 
be  omitted  for  a  year  or  two  without  wrecking 
the  system.  Moreover,  it  might  be  possible  to 
make  them  up  in  some  exceptionally  good  year 
or  years. 

16.  There  is  practically  no  actuarial  expense 
other  than  that  included  in  the  cost  of  the  an- 
nuity policies.  Moreover,  the  administrative 
burden  is  very  materially  reduced,  since  the  great 
bulk  of  the  work  would  be  conducted  by  the  in- 
surance company  underwriting  the  plan. 

It  is  apparent,  therefore,  that  as  compared  with 


118       INDUSTRIAL  PENSION  SYSTEMS 

the  ordinary  pension  system  such  a  system  of 
cumulative  service  annuities  has  a  strong  ap- 
peal. Against  the  advantages  thus  claimed  for 
the  system,  however,  are  some  disadvantages. 

Arguments  against  the  Annuity  Plan  Analyzed 

One  objection  certain  to  be  raised  by  some  em- 
ployers is  that  it  is  not  good  business  to  purchase 
annuities  for  men  who  will  leave  their  employ 
before  reaching  superannuation.  This  is  a  prac- 
tical consideration.  Out  of  a  group  of,  say,  one 
hundred  members  of  even  the  "stabilized"  por- 
tion of  the  working  force,  a  considerable  number 
will,  for  one  reason  and  another,  leave  long  be- 
fore they  become  superannuated.  The  employer 
justly  raises  the  question  whether  there  is  any 
real  advantage  to  him  in  purchasing  annuities  for 
such  men.  At  first  sight  the  payments  represent 
a  needless  outgo.  If,  however,  the  cost  of  the 
deferred  annuity  is  considered  as  extra  compensa- 
tion earned  by  continued  service,  this  objection 
loses  its  force,  since  the  employer  is  not  injured 
any  more  than  he  would  be  had  he  paid  the  cost 
of  this  annuity  in  the  form  of  a  cash  bonus.  If, 
on  the  other  hand,  the  deferred  annuity  actually 
comes  out  of  the  worker's  wage,  the  employer,  as 
a  matter  of  equity,  should  be  as  ready  to  pay 


"SINGLE  PREMIUM"  ANNUITIES        119 

this  portion  of  the  wage  as  any  other.  The 
worker,  it  is  true,  might  be  disposed  to  object  to 
such  an  annuity  if  he  felt  that  it  did  depress  his 
current  cash  wage.  If,  however,  the  plan  were 
properly  presented  to  him,  he  might  willingly  ac- 
cept such  postponement  of  a  part  of  his  wage,  in 
view  of  the  definite  assurance  that  he  would  even- 
tually get  it  back,  and  of  the  feeling  that  he  was 
making  provision  for  his  superannuation  without 
any  element  of  charity.  It  would  seem  that  the 
wisdom  of  introducing  such  a  plan  on  a  non-con- 
tributory basis  is  largely  dependent  upon  the  ac- 
ceptance of  this  principle  by  the  worker.  In  other 
words,  the  annuity  should  be  recognized  by 
both  employer  and  employee  as  a  special  wage, 
and  placed  on  a  contractual  basis  from  year  to 
year. 

Another  objection  likely  to  be  raised  against 
the  annuity  plan  here  discussed  is  that  the  cost 
of  each  successive  annuity  policy  for  any  indi- 
vidual worker  steadily  increases  with  his  age,  and 
that,  in  the  case  of  workers  nearing  the  retire- 
ment age,  the  cost  becomes  very  high.  Thus, 
whereas  one  type  of  paid-up  annuity  policy  pro- 
viding for  an  annuity  of  $10  commencing  at  age 
sixty-five  would  cost  only  $10.51  for  a  worker  at 
age  twenty,  the  cost  of  such  a  policy  at  age  sixty 


120       INDUSTRIAL  PENSION  SYSTEMS 

would  be  approximately  $69.^  On  the  surface, 
therefore,  the  annuity  plan  contemplates  an  in- 
creased annual  payment  for  those  workers  whom 
it  is  relatively  least  desirable  to  retain,  namely, 
those  approaching  old  age. 

Against  this  objection  it  may  be  urged  that  the" 
high  cost  of  annuities  at  these  later  ages  is  appar- 

*  The  cost  depends,  of  course,  on  many  thing:s,  especially  the 
nature  of  the  benefits  included.  The  following  schedule  pre- 
pared by  a  large  life  insurance  company  illustrates  the  way 
in  which  the  cost  of  successive  policies  increases  with  the  age 
of  the  worker.  The  costs  here  given  are  for  a  retirement 
benefit  only  and  do  not  include  a  death  benefit,  or  a  disability 
benefit. 

Table  1.  Schedule  of  Considerations  (for  males)  at  various 
ages  necessary  to  provide  a  paid-up  annuity  of  $10  per 
annum  to  commence  at  age  65. 


Age 

Age 

Age 

Near- 

Considera- 

Near- 

Considera- 

Near- 

Considera- 

est 
Birth- 

tion 

est 
Birth- 

tion 

est 
Birth- 

tion 

day 

day 

day 

15 

$8.52 

32 

$17.55 

49 

$37.94 

16 

8.88 

33 

18.32 

50 

3955 

17 

9.26 

34 

19.14 

51 

41.89 

18 

9.66 

35 

19.99 

52 

44.07 

19 

10.08 

36 

20.89 

53 

46.41 

20 

10.51 

37 

21.83 

54 

48.91 

21 

10.97 

38 

22.81 

55 

51.60 

22 

11.44 

39 

23.85 

56 

54.51 

23 

11.94 

40 

24.94 

57 

57.64 

24 

12.46 

41 

26.09 

58 

61.05 

25 

13.00 

42 

27.30 

59 

64.74 

26 

13.56 

43 

28.58 

60 

68.78 

27 

14.15 

44 

29.92 

61 

7320 

28 

14.77 

45 

31.35 

62 

78.06 

29 

15.42 

46 

32.85 

63 

83.42 

30 

16.10 

47 

34.45 

64 

89.37 

31 

16.80 

48 

36.14 

65 

95.53 

"SINGLE  PREMIUM"  ANNUITIES        121 

ent  rather  than  real,  since  the  company  will  have 
had  the  use  of  the  money,  and  presumably  at  a 
higher  rate  of  profit  than  the  rate  of  accumulation 
at  which  annuities  are  figured.  For  example,  the 
sum  of  $16.10,  which  represents  the  cost  of  such 
a  policy  for  a  male  worker  under  one  plan  at  age 
thirty,  would  amount  to,  roughly,  $52.50  in  thirty 
years  if  compounded  at  four  per  cent.  The  cost 
of  such  an  annuity  policy  at  age  sixty,  would,  as 
just  shown,  be  about  $69,  Assuming,  however, 
that  the  company  had  been  able  to  earn  an  aver- 
age profit  of  ten  per  cent  on  $16.10  over  a  thirty- 
year  period,  the  accumulated  amount  would  be 
about  $280,  or  several  times  the  cost  of  a  $10 
annuity  for  a  worker  at  age  sixty.  Even  if  the 
company  earned  only  six  per  cent  on  such  a  sum, 
the  accumulated  value  over  a  thirty-year  period 
would  be  approximately  $92,50.  Viewed  from 
this  standpoint,  annuities  purchased  for  workers 
at  advanced  ages  actually  cost  the  company  less 
than  those  purchased  at  much  lower  rates  when 
these  workers  were  young. 

As  a  practical  matter,  however,  this  argument 
probably  should  be  disregarded  as  an  employer 
is  likely  to  be  more  impressed  by  the  immediate 
high  cost  of  annuities  for  such  older  workers  than 


122       INDUSTRIAL  PENSION  SYSTEMS 

by  the  fact  that  he  has  had  the  use  of  the  money 
over  a  long  period  of  years. ^ 

A  feature  of  such  a  cumulative  annuity  system 
is  that  the  total  income,  on  retirement,  of  workers 
who  do  not  enter  the  company's  service  until  well 
along  in  life  may  be  comparatively  smaU,  and  less 
than  the  allowances  paid  under  some  pension  sys- 
tems. Against  this,  however,  is  the  fact  that  the 
annuity  plan  confers  benefits  on  a  much  larger 
number  of  workers,  and  that  the  total  amount 
of  the  annunity  runs  approximately  pro  rata  with 
the  years  of  service  rendered.  Because  the  sys- 
tem reaches  a  larger  number  of  workers,  the  cost 
may,  and  presumably  will,  be  greater  than  the  cost 
of  an  ordinary  "discretionary"  pension  system, 
where  the  benefit  will  be  paid  merely  to  the  few 
who  continue  until  the  retirement  age. 

In  some  cases  as,  for  instance,  especially  valu- 
able workers  who  have  served  only  a  few  years, 

'  The  purchase  of  such  annuities  might  be  discontinued  when 
the  worker  had  reached  a  given  age,  say  fifty-five  years.  Such 
a  provision  could  be  justified  both  on  the  ground  of  the  imme- 
diate cost  of  such  annuities  beyond  that  age,  and  also  on 
the  ground  that  there  is  no  particular  value  in  continuity  of 
service  beyond  such  an  age  which  would  warrant  additional 
compensation. 

While,  however,  the  cost  of  individual  annuities  purchased 
prior  to  age  fifty-five  would  be  less  than  if  purchased  at  a 
later  age,  this  method  might  require  the  withdrawal  of  a 
larger  total  amount  of  funds  from  the  company's  treasury  each 
year,  since,  in  order  to  provide  the  worker  with  an  income  of 
a  substantial  amount  on  retirement,  the  individual  policies 
should  be  for  a  larger  amount  than  where  the  purchases  were 
continued  up  to  the  retirement  age. 


"SINGLE  PREMIUM"  ANNUITIES        123 

it  is  possible  that  an  employer  will  feel  disposed 
to  pay  a  somewhat  larger  annuity  on  retirement 
than  the  terms  of  the  plan  strictly  demand.  To 
the  extent  that  this  is  done,  the  payment  loses 
part  of  its  contractual  character  and  assumes  the 
nature  of  a  gratuity.  This  practice  would,  of 
course,  increase  the  cost  of  the  system.  How- 
ever, there  is  no  reason  why  such  an  annuity  plan 
should  cost  more  than  a  pension  plan  which  pro- 
vides corresponding  benefits.  Indeed,  as  shown 
later,  it  may  cost  less.^ 

An  advantage  of  the  annuity  system,  already 
noted,  is  that  it  is  possible  to  operate  it  on  a 
contributory  basis  without  making  the  contribu- 
tory feature  compulsory.  Since  each  year's  pur- 
chase is  a  completed  transaction  in  itself,  defec- 
tions from  the  plan,  while  reducing  the  aggre- 
gate benefit  of  the  individual  withdrawing,  would 
not  prejudice  the  benefits  of  those  who  continue. 
It  has  been  urged,  however,  that  the  contributory 
principle  would  be  greatly  hampered,  if,  indeed, 
not  defeated,  because  of  the  rapidity  with  which 
the  cost  of  individual  annuities  increases  as  the 
age  of  the  worker  advances.  For  instance,  a 
worker  at  age  thirty  might  find  no  difficulty  in 
meeting  one-half  the  expense  of  an  annuity  cost- 
ing at  that  age,  say,  $16,  but  might  be  quite  un- 

'See  p.  191. 


124       INDUSTRIAL  PENSION  SYSTEMS 

able  to  meet  one-half  the  cost  of  a  similar  annuity 
at  age  sixty  when  the  rate  would  be,  say,  $69. 

There  seems  to  be  little  doubt  that  for  workers 
approaching  the  retirement  age  this  steady  and 
rapid  increase  in  cost  often  would  be  too  heavy 
a  burden  and  would  place  a  strong  temptation 
before  them  to  withdraw  from  the  scheme. 

One  method  of  meeting  this  difficulty  is  to  pro- 
vide that  the  worker  shall  not  be  required  to  con- 
tribute at  any  time  more  than  some  fixed  sum, 
or,  say,  one-half  the  cost  of  the  first  annuity  pur- 
chased in  the  series;  that  is,  all  of  the  increase 
in  cost  from  the  time  the  worker  came  into  the 
plan  would  be  borne  by  the  employer,  in  addition 
to  an  amount  representing  one-half  of  the  cost 
of  the  first  annuity.^  Such  a  provision  could 
easily  be  justified  on  the  ground  that,  as  the 
worker's  period  of  service  lengthens,  he  saves  the 
employer  an  increasing  amount  because  of  reduced 
labor  turnover,  and  that  it  is  only  equitable  that 
the  employer  should  recognize  this  by  bearing  a 
larger  share  of  the  cost  of  the  annuity  policy.- 

^This  would  mean  that  if  the  first  annuity,  say  at  age  forty, 
cost  $25,  the  employer  would  pay  $12.50,  while  for  a  similar 
annuity  costing  $69  at  age  sixty,  he  would  pay  $56.50,  the 
employee's  share  remaining  unchanged  throughout  the  period 
at  $12";50. 

"  Or,  if  as  suggested  above,  the  purchase  of  annuities  were 
discontinued  at  age  fifty-five,  this  would  reduce  the  immediate 
cost  to  the  worker,  since  prior  to  that  age  the  cost  of  annuities 
is  less.     Under  such  an  arrangement  the  drain  on  the  worker 


"SINGLE  PREMIUM"  ANNUITIES        125 

The  further  objection  sometimes  has  been  raised 
against  such  an  annuity  system  that  its  cost  would 
tend  to  increase,  because  workers  would  be  in- 
duced to  remain  in  the  service  longer  than  would 
otherwise  be  the  case.  This  in  reality  is  no  ob- 
jection at  aU,  because  continuity  of  service,  so 
long  as  the  worker  is  efficient,  is  precisely  what 
the  employer  desires.  If  the  plan  results  in  in- 
creasing the  length  of  service,  he  can  afford  to 
pay,  at  least  up  to  some  age  limit. 

It  should  be  emphasized  that  the  objection 
sometimes  raised  against  a  withdrawal  equity  in 
the  case  of  a  pension  system,  on  the  ground  that 
workers  will  quit  the  service  in  order  to  secure 
the  benefit  and  spend  it  for  some  needless  luxury, 
can  readily  be  avoided  in  an  annuity  system  by 
the  insertion  of  a  provision  in  the  policies  to  the 
effect  that  they  cannot  be  surrendered  for  cash. 
Such  a  provision  seems  highly  desirable  from  the 
standpoint  of  the  worker's  real  interest.  Indeed, 
such  a  deferred  annuity  policy  ordinarily  would 
not  carry  a  cash  surrender  provision. 

Still  another  objection  has  been  made  against 
the  annuity  system  that  many  workers,  owing  to 
change  of  employment,  would  receive  only  a  very 
few  annuity  policies,  and  would  be  careless  in 

would  come  in  the  prime  of  life,  which  ordinarily  is  the  best 
time  for  him  to  make  provision  against  old  age. 


126       INDUSTRIAL  PENSION  SYSTEMS 

keeping  track  of  these,  so  that  the  "lost  policy" 
problem  would  be  a  source  of  considerable  diffi- 
culty. There  can  be  no  doubt  that  this  objection 
has  some  force.  This  should,  however,  be  re- 
duced in  proportion  as  such  a  system  was  in 
general  operation:  that  is  to  say,  while  a  worker 
who  received  only  two  or  three  policies  might  not 
be  careful  to  preserve  them  if  he  never  expected 
to  receive  any  more,  he  would  have  a  distinct 
incentive  to  take  care  of  them  if  he  expected  to 
receive  others  like  them  from  the  next  establish- 
ment in  which  he  was  employed. 

Summary  and  Conclusions 

All  these,  however,  are  matters  of  detail  which 
do  not  have  a  vital  bearing  upon  the  merits  of 
the  plan.  In  view  of  the  fact  that  such  a  system 
provides  with  certainty  for  payments;  that  it 
affords  something  like  equal  justice  to  all  workers 
pro  rata  with  service  rendered;  that  its  cost  per 
individual  worker  also  tends  to  run  somewhere 
nearly  pro  rata  with  length  of  service;  that  it 
squarely  meets  the  issue  of  deferred  pay;  that 
it  has  no  strings,  reservations,  or  implied  threats; 
furthermore,  that  it  can  be  made  contributory 
on  a  voluntary  basis,  it  would  appear  that  such 
a  method  of  meeting  the  retirement  problem  has 
many  attractive  features.    At  least  it  would  seem 


"SINGLE  PREMIUM"  ANNUITIES        127 

that  the  system  should  be  most  carefully  studied 
by  all  employers  who  are  disposed  to  introduce 
some  systematic  method  of  dealing  with  the  prob- 
lem of  retirement. 

Such  an  annuity  system  would  have  an  increas-' 
ing  appeal  in  proportion  as  its  adoption  became 
general  among  industrial  establishments.  Under 
a  general  adoption  of  the  system  benefits  would 
not  be  terminated  by  change  of  employment.  In- 
stead, each  year  of  service  wherever  rendered  (ex- 
cept for  the  trial  or  waiting  period)  would  be  re- 
warded with  an  annuity  policy.  Therefore,  with 
such  a  system  in  general  operation,  the  great  body 
of  industrial  wage-earners  would  be  making  some 
systematic  provision  against  old  age,  whereas  the 
ordinary  pension  system  provides,  broadly  speak- 
ing, for  only  a  handful.  Consequently,  such  a  sys- 
tem, if  in  general  use,  should  go  a  long  way  toward 
solving  the  problem  of  old  age  dependency  among 
industrial  workers.  Furthermore,  each  employer 
would  feel  under  no  obligation  to  do  more  than 
his  pro  rata  share. 

Perhaps  the  most  important  question  is  the  ef- 
fect of  such  a  cumulative  annuity  system  upon 
the  morale  of  the  worker  himself.  If  the  annuity 
policies  should  be  regarded  by  the  recipients  as 
mere  gratuities,  there  is  grave  reason  to  fear  that 
the  system  might  accomplish    more   harm  than 


128       INDUSTRIAL  PENSION  SYSTEMS 

good.  In  the  long  run,  no  class  can  accept  a  gra- 
tuity from  another  class  without  accentuating 
class  distinctions.  Unless,  therefore,  this  annuity 
plan  can  be  shown  to  be  less  objectionable  on 
this  score  than  the  ordinary  pension  system,  its 
adoption  would  be  a  matter  of  very  doubtful 
wisdom. 

If,  however,  the  worker  is  made  to  feel  that  the 
annuity  policies  received  each  year  have  been 
earned  by  him  by  his  continued  service,  and  are 
not  a  gift,  there  would  seem  to  be  no  reason  why 
the  system  should  undermine  his  self-respect.  It 
seems  entirely  practicable  to  place  the  system  on 
such  a  plane.  Even  on  the  non-contributory  plan 
such  an  annuity  policy  should  not  constitute  a 
gratuity,  for  it  is  on  a  contractual  basis.  If  it 
actually  represents  compensation,  in  addition  to 
the  "going"  rate  of  wages,  to  cover  a  special  qual- 
ity of  service — continuity — it  is  essentially  a 
special  wage.  If,  on  the  other  hand,  because  of 
the  deferred-pay  principle,  it  operates  to  depress 
the  current  wage,  it  clearly  is  not  a  gratuity. 

Any  diflBculty  on  this  score  would  largely  be 
removed  if  the  worker  could  be  induced  to  con- 
tribute, if  not  half,  at  least  a  portion,  of  the  cost 
of  each  year's  annuity,  or  to  purchase  additional 
annuities  from  his  own  funds.  The  employer 
could  justify  the  requirement  of  a  contribution  on 


"SINGLE  PREMIUM"  ANNUITIES        129 

the  ground  that  it  is  a  primary  duty  of  the  em- 
ployee to  provide  for  his  own  old  age.  On  the 
other  hand,  the  employer  could  justify  his  own 
contribution  to  such  a  plan  as  a  matter  of  busi- 
ness, on  the  ground  that  workers  who  thus  con- 
tinued in  his  employ  saved  him  expense,  because 
of  the  consequent  reduction  in  labor  turnover,  and 
that  the  system  enables  him  to  meet  the  problem 
of  superannuation,  while,  by  giving  the  worker 
assurance  of  support  in  old  a^e,  it  may  teAd  to  in- 
crease his  contentment  and  efficiency. 

Final  judgment  as  to  the  wisdom  of  inaugurat- 
ing such  an  annuity  system  will  depend,  to  a  large 
extent,  on  the  broad  question  whether  it  is  not 
better  to  throw  responsibility  for  support  in  old 
age  entirely  upon  the  worker,  even  though,  as  a 
matter  of  fact,  he  frequently  will  have  to  resort 
to  public  charity.  Some  employers,  moreover,  are 
of  the  opinion  that  it  is  desirable  to  limit  the  con- 
tractual relationship  between  employer  and  em- 
ployee, so  far  as  possible,  to  the  single  question  of 
wages,  and  that  the  inclusion  of  collateral  issues 
increases  the  likelihood  of  friction. 

From  the  standpoint  of  Labor,  as  clearly  shown, 
it  has  frequently  been  urged  that  what  the  worker 
wants  is  a  maximum  wage  rather  than  collateral 
benefits,  such  as  insurance  or  pensions.  If  all 
workers  actually  were  provident,  it  would  be  dif- 


130       INDUSTRIAL  PENSION  SYSTEMS 

ficult  to  challenge  this  attitude.  The  practical 
difficulty,  already  emphasized,  is  that,  regardless 
of  the  wages  paid,  a  considerable  number  of  work- 
ers will  arrive  at  old  age  in  a  condition  of  de- 
pendency, so  that  the  employer  is  still  confronted 
with  the  superannuation  problem.  In  many  cases, 
therefore,  it  becomes  a  question  of  deciding  be- 
tween some  formal  retirement  system  or  an  in- 
formal policy.  The  advantages  and  disadvantages 
of  an  informal  policy  are  discussed  in  the  follow- 
ing chapter. 


CHAPTER  VI 

AN   INFORMAL  PENSION   POLICY  VERSUS  A  FORMAL 
SYSTEM 

Many  employers  who  keenly  feel  the  problem 
of  providing  for  the  superannuation  of  their  work- 
ers and  who  desire  to  do  something  to  meet  it 
have  preferred  to  take  any  action  in  a  wholly  in- 
formal way,  varying  the  amount  of  the  payment 
in  individual  instances  according  to  circumstances. 
In  many  cases  this  practice  has  come  about 
naturally,  without  much  consideration  of  the  mer- 
its of  a  formal  system.  In  other  cases,  however, 
decision  to  rely  on  an  informal  policy  has  been 
reached  only  after  careful  study  of  the  pension 
problem  and  of  the  merits  of  a  formal  system  of 
some  sort. 

Thus,  one  employer  who  has  devoted  a  large 
amount  of  study  to  the  question,  and  who  has 
served  on  a  State  Pension  Commission,  said : 

"We  have  no  rigid  or  definite  pension  system. 
We  do,  however,  have  a  more  or  less  informal  pen- 
sion policy,  under  which  aged  workers  are  taken 
care  of  according  to  their  need. 

131 


132       INDUSTRIAL  PENSION  SYSTEMS 

"I  am  positively  of  the  opinion  that  a  pension 
cannot  be  claimed  by  an  industrial  worker  as  a 
right.  At  the  same  time  it  is  good  business  for 
an  organization  like  ours  to  take  care  of  its  super- 
annuated workers,  not  on  the  ground  of  kindness 
or  charity,  but  on  the  practical  ground  that  it  in- 
creases the  good  will  of  the  working  force.  I  be- 
lieve, moreover,  that  good  will  is  increased  to  a 
greater  degree  by  an  informal  method  of  pension 
than  by  a  rigid  system  where  pensions  are  paid 
more  or  less  without  regard  to  the  merits  of  the 
persons  receiving  them.  I  think  it  is  a  mistake 
to  make  any  stir  over  the  fact  that  pensions  are 
paid.  The  recipients  themselves  are  the  best  of 
advertisers,  and  the  fact  that  the  company  takes 
care  of  its  superannuated  workers  will  become 
known  to  the  entire  force  in  a  very  effective  way. 

"In  my  judgment,  pensions  should  be  based  on 
the  merits  or  needs  of  the  individual  pensioner, 
and  not  as  a  reward  for  long  service.  Where  a 
pension  is  paid  because  of  length  of  service  it  be- 
comes in  effect  a  deferred  wage  and  is  bound  to  be 
so  considered.  The  inevitable  tendency  wall  be 
that  the  pension  will  be  taken  account  of  by  the 
wage-earner  in  making  his  wage  bargains.  This 
I  regard  as  undesirable. 

"The  pensions  paid  by  our  establishment  have 
been  paid  only  after  a  very  careful  canvass  of  the 
situation  in  particular  cases.  The  aim  has  been 
merely  to  give  a  sufficient  amount  to  enable  the 
recipient,  with  any  other  income  which  he  or  she 
may  have,  to  live  on  the  basis  of  a  reasonable 
minimum  of  comfort.  If,  for  instance,  it  is  known 
that  the  worker  has  accumulated  some  funds,  or 


i 


AN  INFORMAL  PENSION  POLICY        133 

has  some  other  means  of  income,  the  pension  is 
made  very  small.  In  other  cases  it  is  more  liberal. 
In  some  cases  pensions  have  been  increased  m 
recent  years  to  allow  for  the  increase  in  cost  of  liv- 
ing. On  the  other  hand,  in  two  cases  pensions 
have  been  reduced." 

Several  other  employers,  after  carefully  study- 
ing the  pension  problem,  have  thus  far  decided 
against  introducing  a  formal  system.  Some  of 
these  doubtless  have  an  informal  pension  policy. 

Among  advantages  claimed  for  an  informal 
policy  as  against  a  formal  system  are: 

1.  Complete  freedom  from  contractual  obliga- 
tion. 

2.  Avoidance  of  the  issue  of  deferred  pay. 
Since  pensions  would  in  no  individual  case  be 
assured,  the  worker  would  not  be  disposed  to  ac- 
cept a  reduced  rate  of  compensation, 

3.  Greater  discretion  as  to  the  amount  and 
conditions  of  the  benefit,  and  thus  better  control 
of  the  cost, 

4.  Freedom  from  demands  for  increased 
benefits. 

5.  Greater  freedom  in  hiring  workers  of  ad- 
vanced years ;  under  a  formal  system  there  would 
be  a  tendency  not  to  take  on  such  workers. 

6.  Greater  good  will  value.  Benefits  dis- 
tributed under  an  informal  policy  are,  it  is  urged, 


134       INDUSTRIAL  PENSION  SYSTEMS 

likely  to  be  more  appreciated  than  where  they 
are  counted  upon  long  years  ahead  under  some 
formal  plan,  and  where,  when  received,  they  may 
be  looked  upon  as  disappointing. 

7.  In  years  of  stress  the  benefits  can  be  modi- 
fied without  causing  as  much  dissatisfaction  as 
would  result  from  a  change  in  a  formal  plan. 

Among  disadvantages  urged  against  an  infor- 
mal policy  are : 

1.  That  in  a  large  establishment  it  is  difl&cult 
to  get  into  sufi5ciently  close  touch  with  the 
workers  to  ascertain  their  needs  accurately. 

2.  That  the  administrative  burden  of  consid- 
ering the  merits  of  individual  cases  is  unduly 
heavy. 

3.  That  payments  become  a  pure  charity  and 
thus  tend  to  humiliate  the  worker,  and  to  accen- 
tuate class  distinctions  between  employer  and 
employee. 

4.  That  the  informal  policy  has  a  very  narrow 
appeal  and  consequently  brings  little  response 
from  the  members  of  the  active  force. 

5.  That  an  informal  policy  in  effect  discrim- 
inates in  favor  of  the  shiftless  and  improvident 
workers,  as  against  the  thrifty. 

6.  That  the  benefits  are  likely  to  be  inade- 
quate. 


AN  INFORMAL  PENSION  POLICY        135 

7.  That  the  distribution  of  benefits  is  likely 
to  be  influenced  by  favoritism  of  executives  whose 
opinions  must  largely  be  depended  upon,  and  that 
discrimination  and  dissatisfaction  may  thus  be 
created. 

8.  That  a  large  concern  may  lose  in  prestige, 
on  the  ground  that  it  is  not  keeping  abreast  of  the 
times  if  it  does  not  have  a  definite  retirement 
system. 

The  force  of  these  various  arguments  will  de- 
pend to  a  considerable  extent  on  conditions  in 
the  individual  establishment.  Thus,  in  an  or- 
ganization with  a  large  number  of  plants  and  with 
tens  of  thousands  of  workers,  where  even  execu- 
tives of  the  second  or  third  rank  may  not  come 
in  direct  contact  with  the  employees,  it  would  be 
necessary  under  an  informal  policy  to  throw  much 
responsibility  on  subordinates.  In  these  cases 
there  is  a  very  strong  likelihood  that  a  lack  of 
uniformity  will  result.  In  a  smaller  organization, 
or  one  where  the  plant  managers  are  in  close  con- 
tact with  the  workers,  on  the  one  hand,  and  with 
the  Board  of  Directors,  on  the  other,  the  difficul- 
ties on  this  score  are  less. 

From  the  standpoint  of  direct  financial  outlay, 
an  informal  policy  has  an  advantage  over  a  for- 
mal system,  since  to  a  considerable  extent  the 


136       INDUSTRIAL  PENSION  SYSTEMS 

cost  can  be  controlled  by  the  management.  If, 
however,  this  results  in  retaining  inefficient 
workers  on  the  payroll,  the  saving  in  direct  cost 
may  be  more  than  offset  by  a  loss  in  efficiency. 
Moreover,  even  under  an  informal  policy,  the 
benefits  must  be  fairly  substantial  and  the  cost 
of  the  scheme  must  bear  some  reasonable  relation 
to  the  number  of  workers  needing  assistance  at 
retirement. 

The  advantage  of  an  informal  policy  in  permit- 
ting the  hiring  of  old  men  is  apparent.  There  can 
be  little  question  that  it  is  far  better  to  provide 
jobs  than  to  provide  pensions.  While  in  many 
industries  there  is  an  indisposition  to  hire  men 
over  fifty-five  years  of  age,  others  find  that  they 
can  advantageously  use  men  much  older  than 
this.  If,  however,  such  an  establishment  adopts 
a  formal  pension  system,  it  will  be  much  less 
likely  to  hire  old  men,  and  this  even  though  it 
definitely  announces  that  such  workers  will  not 
be  allowed  to  go  on  the  pension  roll.  The  man- 
agement will  be  fearful  that  some  of  these  older 
workers  wiU,  as  a  matter  of  fact,  eventually  have 
to  be  pensioned,  while  the  great  body  of  workers 
will  take  the  ground  that  pension  benefits  should 
go  to  those  who  spend  the  greater  part  of  their 
lives  in  the  service  of  the  company.    There  will, 


AN  INFORMAL  PENSION  POLICY       137 

therefore,  be  pressure  to  discourage  the  hiring  of 
men  of  advanced  age. 

Of  the  objections  to  an  informal  policy,  one 
urged  with  special  emphasis  is  that  there  is  likely 
to  be  serious  discrimination  in  the  distribution  of 
benefits,  either  through  deliberate  favoritism  on 
the  part  of  subordinate  executives,  or  through  in- 
ability to  determine  with  any  reasonable  accuracy 
the  conditions  affecting  particular  individuals. 
Yet  in  this  respect  a  formal  system  of  the  "dis- 
cretionary" type  seems  to  offer  little  advantage 
over  an  informal  policy.  As  previously  pointed 
out,  one  type  of  executive  may  keep  on  the  pay- 
roll, until  he  reaches  the  retirement  age,  a  worker 
who  really  should  be  dismissed,  while  another 
may  dismiss  a  worker  amply  able  to  perform  his 
task,  either  to  reduce  the  pension  expenditure  or 
for  other  reasons.^ 

The  objection  that  pensions  under  an  informal 
policy  become  a  mere  charity  is  regarded  by  some 
as  vital.  Others,  however,  regard  them  not  as  a 
charity  but  as  a  means  of  building  up  good  will. 
Under  a  pension  system  of  the  "discretionary" 
type  the  benefits  are  made  to  appear  as  a  gratuity 
or  charity  and,  moreover,  as  a  charity  of  an  osten- 

*  In  the  public  sen'ice  the  danger  of  favoritism  is  far  greater. 
Indeed,  an  informal  policy  is  not  a  practical  method  of  deal- 
ing with  the  superannuation  problem  in  government  service. 


138       INDUSTRIAL  PENSION  SYSTEMS 

tatious  sort.  Yet,  as  a  matter  of  fact,  as  clearly 
shown  in  Chapter  II,  they  may  actually  be  paid 
for  by  the  worker.  In  the  case  of  an  informal 
policy  there  is  no  reason  why  the  payment  should 
thus  assume  the  nature  of  deferred  pay  to  the 
extent  of  depressing  the  current  wages,  since  very 
few  workers  will  ever  receive  a  benefit  and  since 
no  worker  can  count  with  assurance  on  receiving 
one. 

Where  an  informal  policy  is  used,  the  employer 
should  be  extremely  careful  not  to  hold  the  pros- 
pect  of  a  pension  before  his  employees  in  any 
definite  way,  since,  to  the  extent  that  he  does  this, 
there  is  danger  that  it  will  come  to  be  relied  upon 
and  thus  assume  the  nature  of  deferred  pay.  In- 
stead, his  attitude  should  be  that  provision  against 
superannuation  is  the  duty  of  the  individual 
worker.  Under  an  informal  policy,  it  should  be 
understood  that  the  pension  is  in  the  nature  of 
good  will,  and  is  in  no  way  a  contractual  arrange- 
ment. 

One  practical  disadvantage  of  an  informal 
policy,  although  not  inherent,  is  that  the  manage- 
ment will  be  disposed  to  estimate  the  probable 
cost  by  some  rule  of  thumb,  only  to  find  in  a  short 
time  that  the  outlay  is  running  far  beyond  expec- 
tations. It  is  important,  therefore,  that  the  man- 
agement, in  fixing  the  broad  lines  of  such  a  policy, 


AN  INFORMAL  PENSION  POLICY        139 

recognize  clearly  that  the  outlay  will  to  a  greater 
or  less  extent  reflect  the  actuarial  features  of  a 
formal  system,  particularly  in  respect  to  a  continu- 
ing increase  in  cost  over  a  long  period  of  years.^ 
This  diflflculty  need  not  be  a  serious  one  in  the  case 
of  small  establishments,  provided  estimates  are 
frequently  revised.  In  very  large  establishments, 
however,  this  question  may  easily  prove  an 
embarrassing  one  under  an  informal  policy. 

Some  objections  to  an  informal  policy  as  com- 
pared with  a  formal  plan  were  outlined  by  the  In- 
dustrial Bureau  of  the  Merchants'  Association  of 
New  York  as  follows: 

"The  pension  system  gives  the  employee  grow- 
ing old  in  his  employment  an  assurance  of  a 
definite  income  after  retirement,  while  the  infor- 
mal method  gives  such  an  employee  only  the  hope 
that  the  employer  will  have  appreciated  his 
services  sufficiently  to  reward  him  to  some  extent. 
The  difference  to  the  faithful  employee  who  is 
growing  old  is  very  great  indeed. 

"Undoubtedly  the  average  employee  prefers  to 
retire  under  the  provisions  of  a  regular  pension 
system  rather  than  through  the  munificence  of 
the  employer.  Pension  payments  are  considered 
to  be  only  what  is  due  the  employee — a  normal 
part  of  his  return  whicn  he  has  earned  by  faithful 
and  long  service ;  informal  pensions,  even  if  oper- 
ated with  the  greatest  tact  and  kindliness  on  the 

'See  p.  157. 


140       INDUSTRIAL  PENSION  SYSTEMS 

part  of  the  employer,  savor  much  of  charity  to 
the  employee.  Surely  no  employer  who  so  appre- 
ciates the  value  of  long  and  faithful  service  in  an 
employee  that  he  will  make  a  substantial  retire- 
ment gift,  would  knowingly  prefer  to  make  it 
under  circumstances  which  are  disagreeable  to  the 
recipient. 

"Most  pension  systems  state  that  the  employer 
is  under  no  legal  obligations  whatsoever,  yet  no 
reputable  concern  would  consider  stopping  pension 
payments  to  employees.  Under  an  informal 
method,  the  beneficiary  is  by  no  means  certain  of 
receiving  continued  assistance.  The  management 
with  which  the  former  employee  has  had  intimate 
association  may  be  superseded  by  persons  who 
have  no  special  interest  in  the  aged  beneficiary. 

"In  the  large  industrial  concerns  where  the  man- 
agement is  centralized  and  the  workers  are  numer- 
ous and  spread  through  many  departments  or 
plants,  and  where  close  contact  between  the  man- 
agement and  the  men  is  impossible,  the  informal 
method  is  obviously  inadequate.  On  the  one 
hand,  it  fails  to  assure  the  employees  that  all  of 
them  will  be  cared  for  as  they  are  entitled  to 
expect;  on  the  other  hand,  the  work  of  adminis- 
tering it  is  too  cumbersome.  Furthermore,  the 
large  corporation  finds  that  it  can  conduct  its 
affairs  efiiciently  and  economically  only  through 
uniform  methods,  the  cost  of  which  can  be  esti- 
mated in  advance  with  accuracy.  In  this  respect, 
the  pension  plan  is  superior  to  the  informal 
method." 

While  these  objections  are  entitled  to  respectful 


AN  INFORMAL  PENSION  POLICY        141 

attention,  some  of  them  are  open  to  criticism.  It 
will  be  noted  that  this  statement  asserts  that  "a 
pension  system  gives  the  employee  growing  old 
in  his  employment  an  assurance  of  a  definite  in- 
come after  retirement."  In  view  of  what  has  been 
set  forth  in  previous  chapters  this  statement  can- 
not be  held  to  apply  to  the  ordinary  pension  sys- 
tem of  the  "discretionary"  type.  Some  of  these, 
indeed,  give  little  more  assurance,  in  reality,  than 
an  informal  method. 

Likewise  the  statement  that  "no  reputable  con- 
cern would  consider  stopping  pension  payments  to 
employees"  is  open  to  question.  Certainly  the 
majority  of  pension  plans  specifically  stipulate 
that  payments  may  be  so  terminated.  Moreover, 
where  a  change  in  the  rules  is  made,  as  has  been 
done  in  some  cases,  by  which  the  age  and  service 
requirements  are  lengthened,  the  inevitable  effect 
is  to  deprive  a  number  of  employees  of  the  pension 
which  they  would  have  obtained  under  the 
original  plan,  the  prospect  of  which  may  have  been 
an  important  inducement  to  continuance  in  the 
service.  Such  a  change  in  the  rules,  while  perhaps 
in  accord  with  the  letter  of  the  plan,  can  hardly 
fail  to  seem  unjust  to  the  worker  who  thereby 
loses  his  pension. 

As  to  the  contention  in  the  statement  just 
quoted  that  the  work  of  administering  an  informal 


142       INDUSTRIAL  PENSION  SYSTEMS 

policy  in  large  concerns  is  too  cumbersome,  it  must 
be  remembered  that  no  pension  system  operates 
automatically.  Even  under  a  formal  system  indi- 
vidual cases  will  have  to  be  passed  upon  by  the 
pension  committee  or  pension  board,  while  in  any 
establishment  there  will  be  from  time  to  time 
workers  who,  though  not  strictly  entitled  to  a 
pension  under  the  rules,  will,  nevertheless,  for  one 
reason  or  another,  call  for  special  consideration  by 
the  pension  authorities.  In  other  words,  even 
under  a  formal  plan,  there  will  be  a  considerable 
number  of  special  cases  which  wiU  call  for  indi- 
vidual attention. 

For  a  concern  of  moderate  size  it  may  safely  be 
asserted  that  the  administrative  burden  is  much 
smaller  under  an  informal  policy  than  under  a 
formal  pension  system.  The  head  of  a  company 
with  several  thousand  employees  stated  that  under 
its  informal  pension  policy  the  Board  of  Directors 
were  required  to  give  only  a  negligible  amount 
of  time  to  consideration  of  pension  cases.  He 
further  contended  that  there  is  no  serious  diffi- 
culty, even  in  a  larger  establishment,  in  getting 
into  sufficiently  close  contact  with  the  worker  to 
make  an  informal  policy  entirely  practicable. 

Unless  the  number  of  workers  is  so  great  as 
practically  to  compel  the  adoption  of  a  formal 
system,  the  use  of  an  informal  policy  can  largely 


AN  INFORMAL  PENSION  POLICY       143 

be  determined  by  the  purpose  which  the  employer 
seeks  to  accomplish.  Where  the  primary  object  is 
to  relieve  actual  distress  of  faithful  workers  who 
have  rendered  unusually  long  service,  an  informal 
policy  has  many  attractions.  It  obviously  will 
not  be  the  equivalent  of  a  formal  retirement  sys- 
tem recognizing  contractual  rights.  If,  however, 
the  intention  of  the  employer  is  to  reward  all 
workers  who  render  an  unusual  length  of  service, 
regardless  of  their  financial  condition  at  the  time 
of  retirement,  then  it  is  reasonably  certain  that 
an  informal  system  will  be  too  inadequate  and 
too  cumbersome  to  meet  the  needs  of  a  large  estab- 
lishment. 


CHAPTER  VII 

COST  OF  PENSION  SYSTEMS 

Although  the  question  of  cost  obviously  is  a 
vital  and,  indeed,  often  a  controlling  consideration 
in  deciding  on  the  adoption  of  a  pension  system,  it 
is  entirely  safe  to  say  that  a  great  majority  of 
such  systems  have  been  started  without  any  accu- 
rate conception  of  the  ultimate  outlay  involved. 
As  an  inevitable  result,  as  already  noted,  a  large 
number  of  pension  schemes,  both  public  and  pri- 
vate, have  come  to  grief. 

The  determination  of  the  cost  of  a  pension  sys- 
tem for  any  individual  establishment  is  a  highly 
expert  actuarial  task  and,  at  best,  involves  many 
uncertainties.  Expenditures  under  a  pension  plan 
project  far  into  the  future  and  ordinarily  increase 
for  a  long  period,  so  that  the  "peak  of  the  load" 
is  not  reached  until  forty  or  fifty  years,  or  per- 
haps even  more,  after  the  sytem  is  started.^ 
Exact  calculations  are,  therefore,  quite  impossible. 
About  the  only  thing  that  can  be  said  with  posi- 
tiveness  on  this  score  is  that  all  worth-while  pen- 

*  In  this  connection  see  p.  157. 
144 


COST  OF  PENSION  SYSTEMS  145 

sion  schemes  are  expensive.  Obviously,  much 
depends  upon  the  scope  of  the  plan  and  the  char- 
acter of  the  benefits  provided.  Many  pension 
plans  include  benefits  which  in  a  strict  sense  are 
not  pensions  proper,  but  are  in  the  nature  of  sav- 
ings or  life  insurance.  All  these  features  tend  to 
increase  the  cost. 

No  reliable  estimate  of  the  cost  of  a  pension  sys- 
tem in  any  individual  case  can  be  made  without 
most  careful  study  of  the  particular  facts  as  to  the 
ages  of  the  workers,  sex  distribution,  rates  of  labor 
turnover,  and  various  other  details.  Actuaries  are 
agreed  that  there  is  no  pension  formula  capable 
of  general  application.  The  cost  of  a  pension  sys- 
tem in  one  establishment  might  be  very  radically 
different  from  the  cost  of  an  identical  plan  in 
another  establishment  where  employment  condi- 
tions on  the  surface  might  seem  very  similar. 

Starting  with  a  given  scheme  of  benefits,  how- 
ever, it  is  possible  to  present  general  estimates  of 
the  cost  of  a  pension  plan  which  will  afford  the 
employer  some  rough  measure  of  the  probable 
financial  burden  involved. 

The  immediate  cost  of  a  pension  system  will 
depend  on  the  method  of  financing.  If  no  pro- 
vision is  made  to  meet  the  liability  in  advance, 
the  cost  will  be  much  greater  than  where  a  fund 
is  gradually  built  up  on  the  compound  interest 


146       INDUSTRIAL  PENSION  SYSTEMS 

principle.  For  example,  an  annual  contribution 
to  a  pension  fund  equivalent  to  two  per  cent  of 
the  payroll  should  yield  an  income  sufficient  many 
years  later  to  meet  pension  disbursements  that 
would  then  be  equal  to  a  much  larger  percentage 
of  the  payroll  of  a  force  of  the  same  size  and  gen- 
eral character. 

Methods  of  Financing  a  Pension  Scheme 
The  method  of  financing  a  pension  plan  is  there- 
fore   of    primary    importance.    Four    principal 
methods  may  be  indicated : 

1.  The  setting  aside  at  the  outset  of  a  fund 
large  enough  to  provide  an  income  sufficient  to 
meet  the  pension  disbursements. 

2.  The  setting  aside  of  a  smaller  fund,  supple- 
menting this  with  annual  appropriations. 

3.  Annual  appropriations,  without  a  fund,  to 
meet  each  year's  expenditures  as  they  arise. 

4.  The  building  up  of  a  fund  on  an  actuarial 
basis  by  setting  aside  such  percentage  of  every 
worker's  pay  as  actuarial  estimates  indicate  will 
be  necessary  to  provide  the  pension.  This  scheme 
may  be  supplemented  by  a  lump-sum  fund  at  the 
start. 

The  first  of  these  methods  will  seldom  be  prac- 
ticable. In  the  case  of  an  establishment  of  mod- 
erate size,  the  settmg  aside  of  an  adequate  sum 


COST  OF  PENSION  SYSTEMS  147 

would  seriously,  if  not  hopelessly,  embarrass  the 
company  in  its  business.  Even  in  the  case  of  ex- 
ceptionally large  and  strongly  financed  companies, 
moreover,  it  will  be  very  difl5cult  to  make  certain 
that  any  fund,  so  set  aside,  will  prove  adequate. 

The  second  method  is  much  better,  but  still 
uncertain,  as  there  is  no  assurance  that  the  appro- 
priation of  each  successive  year  will  not  have  to 
be  greatly  increased. 

The  third  method  is  highly  objectionable,  as 
practically  certain  to  land  a  pension  scheme  on 
the  rocks  of  business  depression,  or  of  unforeseen 
expenditure. 

Of  all  methods  the  fourth  is  the  one  usually 
recommended  by  pension  authorities  where  a 
formal  system  is  introduced.  It  involves  extensive 
actuarial  estimates,  and  a  heavy  administrative 
burden,  with  periodical  revisions  of  the  original 
estimates.  This,  however,  is  the  price  which  an 
establishment  setting  up  a  formal  pension  system 
must  expect  to  pay.  This  actuarial  burden  is 
largely  obviated  in  the  case  of  a  paid-up  annuity 
system. 

By  this  actuarial,  or  "reserve,"  method  the  total 
fund  to  be  built  up  is  the  sum  of  the  amounts 
necessary  in  each  individual  case  as  indicated  by 
calculations  taking  account  of  age,  expectancy  of 
life,   and  various   other   factors.    Such   a   fund, 


148       INDUSTRIAL  PENSION  SYSTEMS 

therefore,  is  in  theory  sound,  provided  the  plan  is 
not  departed  from.  Actually,  as  shown  later,  there 
are  so  many  factors  that  cannot  be  anticipated, 
that  even  such  a  scheme  must  be  almost  constantly 
"revalued"  in  order  to  assure  its  solvency. 

Under  this  method  the  interest  accumulation 
goes  a  long  way  towards  meeting  the  final  pen- 
sion obligation.  It  could  be  argued  that  the  use 
of  the  funds  by  the  company  would  more  than 
offset  this  difference.  But  as  a  practical  matter 
the  argument  in  the  case  of  a  pension  system  is 
in  favor  of  the  reserve  method,  even  from  the  em- 
ployer's standpoint.  From  the  employee's  side  the 
advantage  is  altogether  in  favor  of  the  reserve 
method,  with  the  pension  funds  kept  entirely 
separate  from  those  of  the  company.  Otherwise 
the  prospect  of  a  pension  long  looked  forward  to 
may  suddenly  be  swept  away  by  some  acute  busi- 
ness depression  or  other  unforeseen  contingency. 

In  the  case  of  a  system  of  paid-up  annuities, 
the  worker  has  complete  protection  in  respect  to 
benefits  already  earned  by  previous  service.  Even 
with  an  annuity  system,  however,  it  may  be  de- 
sirable to  set  aside  or  build  up  a  fund  which  will 
yield  an  income  sufficient  to  meet  the  yearly  cost 
of  annuities. 

While  the  actuarial  method  of  accumulating  a 
fund  is  extensively  used  in  public  service  pension 


COST  OF  PENSION  SYSTEMS  149 

systems,  it  is  too  seldom  employed  in  private 
pension  plans.  The  result  is  a  very  rapid  increase 
in  the  expenditure  for  pensions  which  often,  and, 
indeed,  usually  necessitates  increased  appropria- 
tions, or  forces  a  radical  reorganization  of  the  plan. 

Outside  of  the  amount  of  the  benefit  and  the 
years  of  service  or  the  retirement  age  stipulated, 
the  cost  of  a  pension  system  by  any  given  method 
of  financing  ordinarily  will  be  influenced  chiefly  by 
the  fact  whether  or  not  the  plan  includes  with- 
drawal equities  and  death  benefits.  Obviously, 
a  system  which  does  not  provide  for  a  withdrawal 
equity  to  employees  separated  from  the  service 
prior  to  the  retirement  age,  or  which  does  not 
provide  a  death  benefit,  will  cost  less  and,  indeed, 
very  much  less,  than  a  system  otherwise  similar 
but  under  which  such  benefits  are  included. 

In  discussing  this  feature  there  frequently  has 
been  a  tendency  to  compare  the  costs  of  non- 
contributory  with  those  of  contributory  systems. 
It  should  be  emphasized,  therefore,  that  the  mere 
question  whether  the  entire  cost  is  borne  by  the 
employer,  or  is  shared  between  him  and  his  em- 
ployees, cannot,  if  all  other  conditions  are  the 
same,  affect  the  actual  cost.  The  question,  who 
pays,  is  a  detail  which,  while  important,  does  not 
enter  into  the  actuarial  problem  except  in  so  far 
as  it  may  influence  the  character  of  the  benefits 


150       INDUSTRIAL  PENSION  SYSTEMS 

provided,  or  the  number  and  class  of  employees 
included.  The  confusion  on  this  point  probably 
has  arisen  because  it  happens  that  non-contribu- 
tory systems  usually  exclude  withdrawal  equities 
and  frequently  exclude  death  benefits,  whereas  a 
contributory  system  ordinarily  includes  both. 
This  is  entirely  natural,  since,  under  a  contribu- 
tory system,  employees  will  almost  certainly  insist 
upon  the  right  to  withdraw  their  contributions  in 
the  event  of  separation  from  service,  and,  more- 
over, will  be  disposed  to  demand  death  benefits 
and  other  benefits  which  they  might  not  be  in  a 
position  to  demand  under  a  non-contributory 
system. 

Systems  without  Withdrawal  or  Death  Benefits 

As  a  rough  approximation  it  may  be  said  that 
a  pension  system  for  industrial  wage-earners,  pro- 
viding a  modest  retirement  benefit — but  with  no 
withdrawal  or  death  benefit — will  require  an 
annual  contribution  of  at  least  two  to  two  and  a 
half  per  cent  of  the  total  payroll  at  normal  rates 
of  wages,  in  the  case  of  a  representative  manufac- 
turing corporation  of  substantial  size.  It  should 
be  emphasized  that  this  cannot  be  laid  down  as  a 
specific  formula,  since  conditions  peculiar  to  a 
given  establishment  or  to  a  given  industry  may 
be  such  as  to  require  a  much  larger  amount.    On 


COST  OF  PENSION  SYSTEMS  151 

the  other  hand,  it  may  be  that  for  some  establish- 
ments a  contribution  of  slightly  less  than  two  per 
cent  would  suffice,  say,  for  instance,  in  the  case 
of  a  concern  having  an  unusually  large  proportion 
of  women  workers,  few  of  whom  would  ever  go 
on  the  pension  roll.  It  would  seldom  happen, 
however,  that  a  pension  system  providing  only  a 
modest  retirement  benefit  can  be  maintained  on  a 
much  smaller  annual  contribution  than  two  per 
cent  of  the  total  payroll.  On  such  a  basis,  more- 
over, it  ordinarily  would  be  necessary  to  make 
special  provision  to  cover  the  cost  of  meeting 
accrued  liabilities.^ 

It  is  true  that  several  industrial  establishments 
with  pension  systems  in  force  have  found  that  the 
outlay  during  the  brief  periods  that  these  have 
been  in  operation  has  been  considerably  less  than 
two  per  cent  and,  indeed,  even  less  than  one  per 
cent  of  the  total  payroll.  But  it  is  not  reasonable 
to  expect  that  costs  can  permanently  be  held 
down  to  such  a  ratio  if  the  plan  is  really  effective. 
All  well-informed  students  of  the  pension  problem 
are  agreed  that  such  a  small  percentage  of  the 
payroll  will  not  suflfice  to  provide  pension  pay- 
ments over  a  long  period  of  years,  even  under  a 
plan  which  includes  no  withdrawal  or  death 
benefit,  and  under  which  the  retirement  benefit 

"See  p.   172. 


152       INDUSTRIAL  PENSION  SYSTEMS 

itself  is  of  modest  size.  Moreover,  a  contribution 
of  two  per  cent  ordinarily  cannot  be  expected  to 
provide  pensions  for  "back  service"  of  the  existing 
force.  The  cost  of  pensions  for  such  back  serv- 
ice, constituting  what  is  technically  known  as 
the  "accrued  liability,"  would  have  to  be  met 
either  by  special  appropriation,  or  by  increasing 
the  annual  rate  of  contribution  over  a  period  of 
years.  For  instance,  if  a  contribution  of,  say,  two 
per  cent  were  required  to  meet  the  future  pen- 
sion liabilities,  the  fund  might  speedily  become 
bankrupt  if  it  immediately  had  to  meet  pensions! 
for  those  workers  already  at,  or  near,  the  retire- 
ment age.  In  some  cases,  such  a  contribution 
might  cover  part  of  the  cost  of  "accrued  liabili- 
ties." 1 

Subject  to  these,  and  various  other,  qualifica- 
tions the  statement  may  be  ventured  that  many 
industrial  establishments  of  substantial  size  and 
normal  labor  turnover  could  hope  to  finance  a  pen- 
sion system  of  this  limited  sort  on  an  annual  con- 
tribution of  two  to  two  and  a  half  per  cent  of  the 
payroll.  In  many  cases,  however,  unforeseen 
contingencies  will  compel  supplemental  contribu- 
tions to  the  fund  in  order  to  maintain  its  solvency. 

A  representative  of  an  engineering  organization 
which  has  instituted  several  pension  systems  has 

*  For  a  further  discussion  of  this  point,  see  pp.  173,  174. 


COST  OF  PENSION  SYSTEMS  153 

said:  "Rarely  is  it  feasible  for  a  corporation  to 
appropriate  in  advance  a  sum  suflBcient  for  all  pen- 
sion needs."  ^ 

Systems  Providing  for  Withdrawal  and  Death 
Benefits 

As  just  explained,  a  pension  system  providing 
for  withdrawal  equities  to  those  members  of  the 
force  who  are  separated  from  the  service  before 
reaching  the  retirement  age,  or  death  benefits  for 
those  who  die  before  reaching  that  age,  must 
necessarily  cost  more  than  a  plan  otherwise  simi- 
lar, but  under  which  no  such  benefits  are  provided. 
Such  withdrawal  equities  and  death  benefits  tend, 
of  course,  to  interfere  with  the  building  up  of  the 
pension  fund  under  the  operation  of  the  compound 
interest  principle. 

Broadly  speaking,  it  may  be  assumed  that,  for 
a  given  establishment,  a  pension  system  providing 
the  same  retirement  benefit  as  could  be  secured 
by  a  contribution  of  two  per  cent  of  the  payroll 
where  no  other  benefits  were  promised,  but  which, 
in  addition,  provided  for  withdrawal,  disability, 
and  death  payments,  will  require  a  total  contribu- 
tion of  at  least  five  to  six  per  cent  of  the  payroll, 
probably  more.- 

'Elmer  B.  Tolsted.    Cotton,  November,  1920,  p.  7. 
'  In  the  case  of  public  service  pensions  of  this  type,  the  cost 
frequently  is  greater  than  six  per  cent  of  the  payroll,  and  not 


154       INDUSTRIAL  PENSION  SYSTEMS 

Since  the  ordinary  contributory  pension  plan 
dqes  provide  these  benefits,  such  an  estimate  may 
be  regarded  as  roughly  applicable  to  a  pension 
system  of  this  type.  But,  as  already  pointed  out, 
it  should  be  kept  in  mind  that  the  question 
whether  the  system  is  contributory  or  non-con- 
tributory is  not  the  governing  consideration.  Such 
a  cost  ratio  would  be  equally  applicable  to  a  non- 
contributory  system  which  provided  the  same 
schedule  of  benefits. 

Again,  it  should  be  emphasized  that  this  is  noth- 
ing more  than  a  rule  of  thumb,  and  cannot  be 
taken  as  a  working  formula  until  verified  by 
actuarial  calculations  based  on  the  experience  of 
the  individual  establishment. 

It  also  should  be  repeated  that  these  estimates 
may  easily  be  upset  by  special  circumstances.  For 
instance,  the  inclusion  of  highly  paid  executives  at 
liberal  rates  of  benefit  might  very  seriously  in- 
crease the  cost  of  the  plan.^ 

infrequently  greater  than  ten  per  cent.  Oftentimes,  however, 
such  systems  provide  for  substantial  benefits  to  widows  or 
dependent  children,  which  add  greatly  to  the  cost. 

If  the  death  benefit  is  limited  merely  to  the  return  of  the 
employees'  contributions,  the  cost  might  be  less  than  five  or 
six  per  cent. 

*  An  instance  is  cited  of  a  company  where  a  considerable 
number  of  such  executives  went  on  the  pension  roll  at  one 
time,  with  the  result  that  the  "curve"  of  the  pension  load  was 
thrown  radically  out  of  its  calculated  course.  In  this  case  it 
happened  that  nearly  all  of  these  executives  died  within  a 
single  year,  with  the  result  that  the  curve  was  speedily  brought 


COST  OF  PENSION  SYSTEMS  155 

In  practically  all  cases  it  is  necessary  to  revise 
original  estimates  at  frequent  intervals,  in  order 
to  guard  against  such  departure  from  them  as 
might  eventually  involve  the  scheme  in  bank- 
ruptcy. Failure  to  take  this  precaution  has  been 
responsible  for  the  collapse  of  many  pension  funds 
or  schemes  which  at  their  inception  apparently 
were  sound.  Indeed,  it  is  hardly  too  much  to  say 
that  bankruptcy,  either  actual  or  constructive,  has 
been  the  common  fate  of  pension  plans.  This  has 
been  especially  true  in  public  service.  Most  of 
the  systems  now  in  effect  in  private  industry  have 
been  in  operation  for  too  short  a  period  to  test 
their  soundness,  but,  as  stated  in  an  earlier  chap- 
ter, the  financial  stability  of  many  of  them  is  ex- 
ceedingly doubtful. 

Even  with  frequent  revision  of  estimates,  there 
is  danger  that  unforeseen  events  will  upset  calcu- 
lations, and  that  supplemental  contributions  will 
be  required  unless  the  benefits  are  modified.  It 
has  been  remarked  that  no  gratuitous  circum- 
stance comes  to  the  relief  of  a  pension  scheme. 
The  accidents  and  contingencies  almost  invariably 
operate  against  the  plan  from  a  financial  stand- 
point. 

back  to  its  normal.  If,  however,  these  executives  had  lived 
to  an  unusual  age,  the  plan  might  easily  have  been  perma- 
nently embarrassed. 


156       INDUSTRIAL  PENSION  SYSTEMS 

Long-Continued  Increase  in  Pension 
Disbursements 

Mention  has  been  made  of  the  almost  invariable 
tendency  of  pension  disbursements  under  any 
formal  plan  to  increase,  and  to  increase  for  a  long 
period  of  time. 

The  public  generally  is  familiar  with  this  prin- 
ciple as  illustrated  by  the  pensioning  of  veterans 
of  the  Civil  War,  under  which  the  disbursements 
continued  to  increase  heavily  long  after  succes- 
sively predicted  "peaks"  had  been  reached.  This 
experience  is  largely  the  reflection  of  a  funda- 
mental actuarial  principle,  which  also  holds  in  the 
case  of  private  industrial  pension  systems. 

This  tendency  is  well  illustrated  by  Chart  1  giv- 
ing estimates  of  future  pension  disbursements 
under  three  plans,  as  prepared  in  the  office  of  an 
organization  which  has  installed  several  pension 
systems.  These  curves  may  be  regarded  as  more 
or  less  typical  of  the  normal  course  of  pension  dis- 
bursements for  a  large  establishment. 

It  will  be  noted  that  all  of  the  curves  in  this 
chart  show  a  fairly  rapid  and  continuous  rise  over 
a  period  varying  from  forty  to  sixty  years.  In 
only  one  of  the  three  curves  shown  is  the  peak  of 
the  load  reached  earlier  than  fifty  years. 

One  reason  why  expenditures  thus  increase  is 


COST  OF  PENSION  SYSTEMS 


157 


that  new  pensioners  are  steadily  being  added  be- 
fore those  originally  pensioned  die.  Thus  the 
average  expectancy  of  life  for  males  at  age  sixty 

Chart  1.  Curves  Showing  Estimated  Course  of  Pension 
Expenditures  Over  a  Long  Period  of  Years  Under  Three 
Different  Plans. 

(Prepared  by  Independence  Bureau,  Philadelphia,  Pa.) 
Published  in  Cotton,  November,  1920. 


k  no.em  1 1  I  M  I  [T 


2l: 


it 


i'-:. 


a 


;r- 


I9ZO  ITSO  I140  *9S0  t*tO 


/f«»  «< 


is  about  fourteen  years.  If  ten  persons  in  a  given 
force  are  retired  each  year  at  age  sixty,  the  pen- 
sion roll  might  increase  to  one  hundred  and  forty 


158       INDUSTRIAL  PENSION  SYSTEMS 

before  new  additions  were  offset  by  deaths.  This, 
however,  might  require  a  period  of  much  more 
than  fourteen  years.  In  the  meantime  workers  of 
younger  age  at  the  time  the  plan  was  started 
would  begin  to  come  on  the  rolls  in  increasing 
numbers. 

The  principle  involved  is  illustrated  in  Chart  2 
prepared  by  an  expert  for  the  Massachusetts  Com- 
mission on  Pensions.  This  chart  also  clearly 
brings  out  the  fact  that  while  the  provision  for 
present  workers  is  a  more  immediate  problem,  it 
is  far  less  important  from  the  standpoint  of  ulti- 
mate cost  than  the  provision  for  new  entrants  into 
the  service.^ 

Actual  Experience  under  Private  Pension  Plans 

Experience  of  Baltimore  &  Ohio  Raiload  Com- 
pany. It  is  interesting  to  compare  these  typical 
curves  with  actual  experience  under  one  of  the 
oldest  pension  plans  in  the  United  States,  that  of 
the  Baltimore  &  Ohio  Railroad  Company.  This 
plan  was  established  in  1884,  on  a  non-contribu- 
tory basis,  to  succeed  a  Relief  Association  which 
had  been  established  a  few  years  earlier.  At  the 
time  that  the  pension  plan  was  inaugurated  there 
was  turned  over  to  it  by  the  Relief  Association 

^  Report  of  Massachusetts  Commission   on   Pensions,   1914, 
p.  59. 


COST  OF  PENSION  SYSTEMS 


159 


160       INDUSTRIAL  PENSION  SYSTEMS 

the  sum  of  $86,000,  and  the  Railroad  Company 
agreed  to  contribute  $25,000  annually,  together 
with  an  additional  sum  of  $6,000  representing  in- 
terest accruing  on  a  $100,000  endowment  of  the 
Relief  Association  (provided  that  this  sum  was 
not  required  for  other  purposes).  Assuming  that 
there  was  no  drain  on  this  endowment,  the  Rail- 
road's total  contribution  to  the  plan  would  there- 
fore have  been  $31,000  per  year.  As  a  matter  of 
fact,  this  was  the  actual  contribution  for  several 
years. 

For  the  first  eight  years  of  the  operation  of  the 
plan  the  appropriation  by  the  company  was  more 
than  sufficient  to  meet  the  payments  to  pen- 
sioners, but  during  the  next  five  years  the  pay- 
ments ran  heavily  in  excess  of  the  railroad's 
contribution  which,  in  1901,  was  increased  to 
$75,000  and,  in  1905,  to  $82,550.  In  a  very  few 
years,  however,  the  pension  disbursements  heavily 
exceeded  this  increased  contribution  and,  by  1913, 
the  latter  was  increased  to  $146,000;  again,  in 
1914,  to  $234,000;  and  still  again,  in  1915,  to 
$266,000.  The  rapid  increase  in  payments  and  in 
the  amount  required  from  the  company  are  shown 
in  the  accompanying  table.  ^ 

*It  may  be  noted  that  the  amounts  appropriated  by  the 
company  were  supplemented  by  some  other  miscellaneous  re- 
ceipts from  subsidiary  companies  and  from  other  sources.  A 
statement  of  these  is  not  essential  to  the  comparison. 


COST  OF  PENSION  SYSTEMS 


161 


Doubtless  the  exceptionally  rapid  increase  in 
disbursements  in  recent  years  is  partly  due  to  the 
fact  that  the  company's  force  had  been  steadily 

Table  2.  Payments  to  pensioners  and  amounts  appropriated 
by  the  company  under  Baltimore  and  Ohio  Railroad  Com- 
pany's non-contributory  pension  plan  1885-1915. 


Fiscal  Year  Ended 

Payments  to 
Pensioners 

Amount 
appropriated 
by    Company 

Sept.  30.  188.5 

S  7,354 

18,125 

20.669 

23,438 

24,160 

25,100 

27,894 

22,381 

31,954 

34,457 

34,800 

34,726 

46,346 

50,242 

52,117 

49,026 

55,830 

63,143 

64,730 

67,199 

73,322 

82,972 

95,310 

112,356 

129,247 

157,273 

174,746 

193,908 

212,645 

234,292 

266,538 

S31,000 

'     1886 

31,000 

'     1887 

'     1888 

'     1889 

31,000 
31,000 
28,000 

« 

'     1890 

30,500 

(( 

'     1891 

31,000 

June  3 
II      1 

0,  1892 

'     1893 

24,750 
29,500 

«      1 

'     1894 

31,000 

(1 

'     1895 

31,000 

<i      1 

'     1896 

37,000 

«      1 

'     1897 

31,000 

((      1 

'     1898 

31,000 

«      1 

'     1899 

31000 

«      I 

'     1900 

31,000 

It      1 

'     1901 

75,000 

«      ( 

'     1902 

75,000 

«      1 

'     1903 

75  000 

II      ( 

'     1904 

75,000 

II      1 

'     1905 

82  550 

it      1 

'     1906 

82  550 

II      1 

'     1907 

82,550 

82,550 

82,550 

82,550 

82,550 

82,550 

146,000 

234,292 

266,538 

11      1 

'     1908 

<i      1 

'     1909 

II      1 

'     1910 

II      1 

1911 

II      1 

1912 

II      1 

1913 

<i      1 

1914 

II      1 

'     1915 

Note:  This  table  and  the  data  given  in  the  text  are  taken  from 
a  study  made  for  the  Carnegie  Foundation  by  Professor  G.  E.  Bar- 
nett  of  Johns  Hopkins  University.  Thirteenth  Annual  Report  of 
the  Carnegie  Foundation  for  the  Advancement  of  Teaching,  dd. 
110-113- 


162       INDUSTRIAL  PENSION  SYSTEMS 


increased,  so  that  pensions  in  1915  were  being 
paid  to  some  workers  who  were  not  in  the  com- 
pany's employ  when  the  plan  was  started. 

Under  the  terms  of  the  pension  plan  the  bene- 
fits were  limited  to  members  of  the  Relief  Asso- 
ciation. The  number  of  pensioners  at  the  end  of 
a  twenty-five-year  period  constituted  a  steadily 
increasing  proportion  of  the  membership  of  the 
Relief  Association  twenty-five  years  earlier.  This 
is  indicated  by  the  following  table:  ^ 

Table  3.  Ratio  of  pensioners  to  membership  in  Relief  Asso- 
elation  twenty-five  years  earlier  under  Baltimore  and  Ohio 
Railroad  Company's  pension  plan  1883-1891. 


1883 
1884 
1885 
1886 
1887 
1888 
1889 
1890 
1891 


Membership 


15,989 
16,848 
17,002 
18,297 
21,226 
21,211 
20,081 
21,722 
21,587 


Pensioners 
25  Years  Thereafter 


(1908) 
(1909) 
(1910) 
(1911) 
(1912) 
(1913) 
(1914) 
(1915) 
(1916) 


511 

586 
667 
708 
787 
862 
923 
1,036 
1,062 


Percentage 

of 
Membership 


3.2 
3.5 
3.9 
3.9 
3.7 
4.1 
4.6 
4.7 
4.9 


This  experience  of  the  Baltimore  &  Ohio  Rail- 
road Company  with  its  pension  plan,  therefore, 
fully  bears  out  the  actuarial  principle  that  under 
a  formal  pension  system  disbursements  continue 
to  increase  over  a  long  period  of  years. 

The  marked  increase  in  disbursements  recorded 

'  See  footnote,  Table  2. 


COST  OF  PENSION  SYSTEMS  163 

under  the  Baltimore  &  Ohio  plan  has  not  as  yet 
been  fully  duplicated  in  private  pension  systems 
in  industrial  establishments  in  the  United  States. 
One  reason  for  this  is  that  such  systems  in  indus- 
trial establishments  have  in  most  cases  been  in 
effect  only  a  few  years.  There  can  be  little  doubt 
that  they  will  reflect  the  same  actuarial  principle 
of  rising  expenditures  over  long  periods,  unless 
this  is  interfered  with  by  arbitrary  modifications 
of  the  plans. 

However,  while  in  the  case  of  industrial  estab- 
lishments there  is  no  such  extended  experience, 
the  pension  expenditures  of  several  of  these  have 
already  shown  the  traditional  tendency  to  increase 
at  a  rapid  rate. 

Experience  of  American  Sugar  Refining  Com- 
pany. A  striking  illustration  of  this  is  found  in 
the  case  of  the  American  Sugar  Refining  Com- 
pany, as  the  following  record  of  its  pension  dis- 
bursements shows: 

Table  4.    Pension  disbursements  of  American  Sugar  Refining 
Company,  1912-1920. 

1912  (9y2   months)    $15,783.33 

1913  37,030.99 

1914  45,030.03 

1915  55,266.63 

1916  83,897.41 

1917  96,425.24 

1918    109,910.64 

1919    120,780.43 

1920    113,273.39 


164 


INDUSTRIAL  PENSION  SYSTEMS 


The  plan  of  this  company  was  inaugurated  in 
1912  on  a  non-contributory  basis,  and  provides  for 
a  pension  equivalent  to  one  per  cent  of  the  average 
wage  or  salary  during  the  ten  years  preceding  re- 
tirement, multiplied  by  the  years  of  service.  The 
maximum  benefit  for  any  individual  is  $5,000  a 
year,  and  the  minimum,  after  a  service  of  twenty- 
five  years,  $20  a  month.  In  several  respects  the 
plan  is  liberal.  Of  326  pensioners  on  the  roll  at 
the  close  of  1920,  ^ 


4  received 

1  yearly  pension 

of  $3,000  to  $5,000 

5 

1        «           t. 

"      1,500   "      3,000 

5 

(        «           11 

"      1,000   "      1,500 

17 

(        <i           ti 

500   "        900 

12 

t        «           11 

400   "        500 

259 

(             «                    u 

200    "        400 

24 

(           «                (1 

up   "        200 

The  decline  in  the  total  outlay  in  1920  was  due 
to  special  causes.  There  is  every"  reason  to  assume 
that  the  ''peak"  of  the  pension  load  is  many  years 
distant,^ 

Experience  of  Otis  Elevator  Company.  The 
pension  disbursements  of  the  Otis  Elevator  Com- 
pany for  the  period  1913-1920  are  given  on  the 
following  page : 

While  these  disbursements  do  not  show  a  regu- 
lar  graduation   with    respect   to    increase,    they 

*The  average  number  of  persons  employed  by  the  company 
in  1919  was  9,464;  in  1920  it  was  9,286. 

^In  1921,  the  pension  disbursements  were  almost  $135,000. 


COST  OF  PENSION  SYSTEMS  165 

nevertheless  reflect  the  actuarial  principle  that 
disbursements  tend  to  increase  rapidly.  It  may 
be  noted  that  the  increase  in  1919  and  1920  was 
in  part  due  to  a  voluntary  increase  in  the  amount 
of  current  pensions,  intended  to  take  account  of 
the  marked  increase  in  cost  of  living. 

Tabi^  5.    Pension  disbursements  of  Otis  Elevator  Company, 
1913-1920. 

Amount  paid 
Year  for  pensions 

1913   $12,073.02 

1914  15,724.97 

1915  24,286.44 

1916  24,625.36 

1917  25,490.43 

1918  27,934.33 

1919  35,006.96 

1920  41,714.19 

Of  136  pensioners  who  went  on  the  pension  roll 
during  this  eight-year  period,  fifty-five,  or  about 
forty  per  cent,  died.  This,  of  course,  had  a  ten- 
dency to  keep  down  the  pension  expenditure.  In 
all,  one  hundred  and  thirty-one  death  benefits 
were  granted  during  this  eight-year  period,  in- 
volving a  total  expenditure  of  $75,223.47.  This 
sum  is  approximately  thirty-seven  per  cent  of  the 
amount  spent  for  pensions  proper.  The  average 
monthly  per  capita  payment  for  pensions  in  1920 
was  $43.49,  and  the  average  for  prior  years,  $38.04. 

Experience  of  the  United  States  Steel  Corpora- 
tion.   Special  mention  may  be  made  of  the  ex- 


166       INDUSTRIAL  PENSION  SYSTEMS 


perience  under  the  pension  system  of  the  United 
States  Steel  Corporation.  This  plan  is  of  the  non- 
contributory  type,  providing  pensions  amounting 
to  one  per  cent  of  the  average  monthly  pay  re- 
ceived during  the  final  ten  years  of  service,  with 
a  minimum  of  $12  per  month  and  a  maximum  of 
$100  per  month. 

The  annual  expenditures  for  pensions  under 
this  plan  from  its  inauguration  in  1911,  to  1920, 
are  shown  in  the  following  table,  the  number  of 
"active"  cases  on  the  pension  roll  at  the  close  of 
each  calendar  year  also  being  given. 

Table  6.  Pension  disbiirsements  and  number  of  active  cases 
on  the  pension  roll  under  United  States  Steel  Corpora- 
tion's pension  plan,  1911-1920. 


Year 


1911  . 

1912  . 

1913  . 

1914  . 
1915' 

1916  . 

1917  . 

1918  . 

1919  . 

1920  . 


Active 

Cases 

Disbursements 

Dec.  31 

1,606 

$281,457.37 

1,843 

358,780.92 

2,092 

422,815.14 

2.521 

511,967.90 

3,002 

659,389.42 

3,013 

711,130.33 

2,933 

712,506.65 

2,861 

709,059.82 

2,940 

733,707.45 

2,969 

779,766.60 

^  Plan  radically  changed  in  this  year.     See  text. 

The  average  age,  average  length  of  service,  and 
average  monthly  pensions  paid  under  the  United 
States  Steel  Corporation's  plan  have  been  as 
follows: 


COST  OF  PENSION  SYSTEMS 


167 


Table  7.  Average  age,  average  service,  and  average  -pension 
under  the  United  States  Steel  Corporation's  pension  plan, 
1911-1920. 


ALL  CASES 

Age 

Years  of 
Service 

Pension 

1911    

66.66 
63.69 
6373 
63.33 
62.84 
62.10 
62.04 
62.91 
63.67 
64.14 
63.68 

30.40 
29.14 
28.82 
28.76 
28.34 
28.41 
2771 
29.42 
29.04 
29.53 
28.99 

$2075 

1912    

20.30 

1913    

20.85 

1914    

20.40 

1915    

20.85 

1916    

23.15 

1917    

21.90 

1918    

24.85 

1919    

25.75 

1920    

30.90 

General  averages 

22.30 

It  will  be.  noted  that  the  total  disbursements 
rose  sharply  from  1911  to  1916.  Doubtless  they 
would  have  continued  to  rise  had  not  the  Steel 
Corporation  made  a  radical  change  in  the  terms 
of  its  plan  in  1915,  as  a  result  of  which  the  op- 
tional retirement  age  was  advanced  from  sixty 
to  sixty-five  years,  and  the  required  period  of 
service  from  twenty  to  twenty-five  years.  As  the 
Report  of  the  Pension  Fund  for  1916  stated: 
"The  changes  in  the  rules  had  the  effect  of  greatly 
reducing  the  number  of  applicants  for  pensions 
on  account  of  compulsory  retirement  and  of  re- 
tirement at  request."  ^ 

The  fact  that  in  the  case  of  this  great  system 

*  The  effect  of  these  changes  in  the  plan  is  strikingly  brought 


168        INDUSTRIAL  PENSION  SYSTEMS 

the  curve  of  disbursements  has  not  followed  the 
traditional  actuarial  line  is,  therefore,  due  to 
special  circumstances.  Even  with  the  radical 
change  in  the  plan,  the  disbursements  have 
already  shown  a  tendency  to  resume  the  conven- 
tional upward  trend.  Thus,  after  remaining  prac- 
tically stationary  from  1916  to  1918,  they  rose 
considerably  in  1919,  and  still  more  in  1920. 
There  can  be  little  doubt  that  the  increase  will 
continue  unless  a  further  change  is  made  in  the 
rules.^ 

This  change  in  the  rules  is  a  striking  illustra- 
tion of  the  tendency  to  amend  pension  systems,  to 

out  by  the  following  table  showing  the  numbers  of  employees 
retired  in  each  year  by  the  method  given. 

Table  8.    Classification  of  pension  cases  under  United  States 
Steel  Corporation's  pension  plan,  1911-1920. 


Year 

Compulsory 
Retirement 

Retirement 
at   Request 
of  Emploj'ee 

Retirement 
at    Request 
of  Employ- 
ing Officer 

1911    

178 
45 
54 
74 
60 
37 
21 
27 
44 
57 

298 

257 

259 

360 

467 

63 

39 

38 

57 

64 

49 

1912    

27 

1913    

37 

1914    

75 

1915    

48 

1916    

5 

1917    

3 

1918    

10 

1919    

11 

1920    

10 

^In  1921,  the  pension  disbursements  of  the  Corporation  ex- 
ceeded S947,000. 


COST  OF  PENSION  SYSTEMS  169 

which  attention  has  already  been  called  in  this 
discussion.  Without  necessarily  condemning  such 
a  change,  it  is  obvious  that  its  effect  must  have 
been  to  deny  to  a  considerable  number  of  workers 
the  realization  of  a  pension  to  which  they  had 
looked  forward.^  While  necessity  may  at  times 
not  only  justify,  but  compel,  rearrangement  of 
pension  plans,  it  is  obvious  that  it  is  highly  de- 
sirable to  avoid  such  change  by  carefully  can- 
vassing the  probable  burden  at  the  outset  and 
drawing  up  the  plan  accordingly. 

It  is  proper  to  point  out  that  the  pension  dis- 
bursements of  the  United  States  Steel  Corpora- 
tion, while  large,  represent  only  a  trifling  fraction 
of  one  per  cent  of  the  payroll,  which  ranged 
from  $161,400,000  in  1911  to  $479,500,000  in  1919. 
In  long  established  public  service  pension  sys- 
tems, the  pension  disbursements  sometimes  exceed 
twenty,  or  even  thirty,  per  cent  of  the  amount  of 

*It  may  be  noted,  in  this  connection,  that  the  plan  of  the 
United  States  Steel  Corporation  contains  the  following  provi- 
sion: 

"Whenever  it  may  be  found  that  the  basis  named  for  pen- 
sions shall  create  total  demands  in  excess  of  the  annual  income 
increased  by  any  surplus  deemed  applicable  by  the  Board  of 
Directors,  a  new  basis  may  be  adopted  reducing  the  pensions 
theretofore  or  thereafter  granted,  so  as  to  bring  the  total  ex- 
penditures within  the  limitations  fixed  by  the  Board  of  Direc- 
tors. Notice  of  such  new  basis  shall  be  given  before  the  begin- 
ning of  the  year  in  which  it  may  be  decided  to  put  the  same 
into  effect." 


170       INDUSTRIAL  PENSION  SYSTEMS 

the  payroll.  Such  a  ratio  would,  of  course,  be 
prohibitive  for  an  ordinary  industrial  establish- 
ment. The  ratio  in  the  case  of  the  Steel  Cor- 
poration, however,  is  extremely  low. 

This  experience  of  the  Steel  Corporation's  pen- 
sion plan  also  strikingly  illustrates  the  point  made 
earlier  in  this  report  that  the  ordinary  "discre- 
tionary" pension  system  goes  only  a  small  way 
towards  solving  the  superannuation  problem 
among  a  given  group  of  industrial  workers.  The 
number  of  pensioners  on  the  roll  during  the  past 
six  years — roughly,  3,000  on  the  average — is  only 
about  one  and  a  quarter  per  cent  of  the  average 
total  number  of  employees  on  the  payroll  of  the 
Corporation's  constituent  companies  during  this 
period.  It  is  apparent,  therefore,  that  of  the 
great  army  of  workers  of  the  United  States  Steel 
Corporation  only  a  trifling  percentage  enjoy  a 
pension  benefit.  While  the  pension  system  of  the 
Corporation  has  been  in  existence  only  since  1911, 
many  of  the  largest  plants  of  its  subsidiary  com- 
panies had  been  operating  for  long  periods  of 
years,  so  that  the  number  of  workers  approaching 
superannuation  must  have  been  fairly  large  at 
the  time  the  plan  was  inaugurated.  The  per- 
centage of  pensioners  in  the  case  of  the  United 
States  Steel  Corporation  is  not  radically  different 
from  the  proportion  in  the  case  of  several  other 


COST  OF  PENSION  SYSTEMS  171 

exceptionally  large  industrial  concerns  having 
pension  plans. 

So  small  a  percentage  of  pensioners  to  em- 
ployees indicates  clearly  that  while  such  pension 
systems  may  accomplish  a  measure  of  benefit, 
even  collectively  they  make  only  a  pitiable  ap- 
proach toward  solving  the  problem  of  superan- 
nuation among  industrial  workers.  If  such 
provision  against  superannuation  is  to  be  re- 
garded as  one  of  the  main  reasons  for  establishing 
industrial  pension  systems,  it  would  seem  that 
Industry  may  reasonably  be  required  to  show 
much  more  substantial  results. 

It  is  unnecessary  to  present  further  evidence  of 
the  well-established  fact  that  under  normal  con- 
ditions and  in  the  absence  of  a  change  in  the  pro- 
visions of  the  plan,  disbursements  under  a  pension 
system  increase  at  a  rapid  rate  over  a  long  period 
of  years.  Because  of  this  fact,  it  is  extremely 
important  that  a  company  establishing  a  pension 
scheme  estimate  as  carefully  as  possible  the  prob- 
able ultimate  load.  While  pension  systems  often 
are  established  because  the  employer  feels  the 
pressing  need  of  making  provision  for  employees 
already  at  the  retirement  age,  the  real  problem 
of  a  pension  system  is  not  to  meet  these  immedi- 
ate conditions  but,  instead,  to  make  provision  for 
the  distant  future. 


172        INDUSTRIAL  PENSION  SYSTEMS 

Cost  of  Meeting  "Accrued  Liabilities" 

A  vitally  important  element  in  the  cost  of  a 
pension  or  annuity  system  is  the  heavy  outlay 
necessary  to  provide  pensions  for  the  back  service 
of  employees  who  have  already  completed  con- 
siderable periods  of  service,  some  of  whom  will 
almost  immediately  go  upon  the  pension  roU. 
This  problem  of  meeting  the  "accrued  liabilities," 
as  it  is  technically  called,  is  one  clearly  under- 
stood by  actuaries,  but  too  often  overlooked  by 
employers  about  to  inaugurate  a  retirement  sys- 
tem. As  one  writer  has  said:  '^very  plan  for 
maintaining  a  pension  system  has  sooner  or  later 
encountered  the  difficulties  of  the  'accrued  liabili- 
ties,' and  upon  this  rock  most  pension  systems 
have  foundered."  ^ 

In  this  connection,  the  Special  Committee  of 
the  Merchants'  Association  of  New  York  well 
said:  ^ 

"One  of  the  fundamental  problems  is  so  essen- 
tial that  it  is  entitled  to  especial  emphasis.  This 
is  the  problem  termed  that  of  the  'accrued  liabili- 
ties.' These  are  the  liabilities  with  which  a  pen- 
sion system  starts  owing  to  the  previous  service 
of  employees  when  there  was  no  pension  system. 

^  Carnegie  Foundation  for  the  Advancement  of  Teaching, 
Bulletin  No.  9,  pp.  41-42. 

"  For  further  discussion  of  this  point  see  various  reports  of 
the  Carnegie  Foundation  for  the  Advancement  of  Teaching. 


COST  OF  PENSION  SYSTEMS  173 

It  is  always  a  heavy  cost.  It  must  always  be  met 
somehow.  The  handling  of  it  properly  requires 
skillful  and  scientific  management,  actuarial 
knowledge,  and  pension  experience.  The  direc- 
tors of  a  corporation  can  feel  certain  that  a  pro- 
posed pension  plan  is  amateurish,  and  therefore 
inadequate,  unless  this  problem  is  exhibited  in  the 
clearest  light  and  a  satisfactory  solution  offered. 
No  lucky  event  ever  comes  to  the  rescue  of  a 
pension  system.  Unless  it  starts  right,  by  careful 
thought  beforehand,  it  is  doomed.  The  'accrued 
liabilities'  are  of  the  essence  of  this  forethought." 

Obviously,  if  the  contributions  made  to  a  pen- 
sion fund  were  immediately  absorbed  in  paying 
pensions  to  workers  already  grown  old  in  the 
service,  there  would  be  no  accumulation  of  funds 
to  meet  future  pensions  for  the  younger  members 
of  the  force,  or  for  future  entrants  on  the  force. 
It  is,  therefore,  almost  invariably  necessary  to 
make  some  special  provision  for  meeting  these 
"accrued  liabilities."  This  can  be  done  in  a 
variety  of  ways.  One  of  the  simplest  methods  of 
meeting  this  charge  in  the  case  of  an  establish- 
ment with  ample  resources  is  to  set  aside  a  fund 
sufficient  to  provide  pensions  for  all  back  service 
rendered  at  the  time  the  plan  is  inaugurated. 
This  permits  the  annual  contributions  under  the 
plan  to  accumulate  against  the  needs  of  future 
years.  Few  establishments,  however,  could  afford 
to  set  aside  such  a  fund. 


174       INDUSTRIAL  PENSION  SYSTEMS 

Another  method  of  meeting  the  "accrued  liabili- 
ties" is  to  increase  the  annual  contribution  pro- 
vided for  under  the  plan  for  a  period  of  years, 
using  the  excess  over  the  contribution  determined 
upon  as  necessary  to  meet  pensions  of  future 
years  to  provide  pensions  for  back  service.  For 
instance,  if  it  were  decided  that  an  annual  con- 
tribution of  three  per  cent  of  the  payroU  would 
be  sufficient  to  provide  for  future  service,  then  for 
a  period  of  years  the  annual  contribution  might 
be  fixed  at,  say,  six  per  cent,  using  the  additional 
three  per  cent  to  meet  the  "accrued  liabilities." 

The  cost  of  meeting  these  "accrued  liabilities" 
is  relatively  heavy,  since  many  workers  in  this 
group  will  have  put  in  fairly  long  periods  of 
service  against  which  no  contribution  has  been 
made.  As  an  illustration  of  the  burden  of  this 
item,  it  may  be  noted  that  the  Report  of  the 
Special  Committee  of  the  King  Edward's  Hospital 
Fund  cited  estimates  of  actuaries  to  the  effect  that 
in  the  hospital  services  then  under  discussion, 
composed  mainly  of  salaried  workers,  the  cost  of 
meeting  the  "accrued  liabilities"  would  amount  to 
approximately  a  full  year's  payroll. 

Another  writer  on  the  pension  problem  has 
estimated  the  cost  of  meeting  the  "accrued  lia- 
bilities" under  a  public  service  system  financed  on 


COST  OF  PENSION  SYSTEMS  175 

the  reserve  basis  at  more  than  one  year's  total 
payroll,^ 

The  cost  may  be  substantially  less  in  the  case  of 
an  ordinary  industrial  establishment.  An  esti- 
mate by  an  actuary  of  a  large  life  insurance  com- 
pany for  such  an  establishment,  with  a  low  labor 
turnover,  placed  the  cost  of  meeting  the  "accrued 
liabilities"  in  that  particular  instance  at  sixty- 
nine  per  cent  of  one  year's  total  payroll.^  This 
estimate  was  of  a  somewhat  hypothetical  charac- 
ter and  cannot  be  regarded  as  typical.  It  may 
exceed  the  percentage  necessary  in  the  case  of  a 
concern  with  a  high  labor  turnover.  Much  de- 
pends, of  course,  on  the  nature  of  the  benefits 
included  in  the  plan. 

Heavy  though  the  cost  may  be,  the  problem  of 
the  "accrued  liabilities"  is  one  which  no  employer 
about  to  institute  a  retirement  system  can  afford 
to  disregard.  While  it  might  seem  at  first  sight 
that  the  employer  could  take  the  ground  that  a 
pension  system  need  not  be  retroactive,  it  has 
been  demonstrated  beyond  a  doubt  by  experience 
that  an  employer  who  sets  up  a  pension  system  for 
younger  workers  or  future  entrants,  will,   as  a 

^Paul  Studensky.  "Broadening  the  Scope  of  Pensions  in 
Private  Industry,"  New  Jersey,  Vol.  VI,  No.  8. 

^"Pensions  for  Employees."  E.  E.  Cammack,  Associate 
Actuary,  .^tna  Life  Insurance  Co. 


176       INDUSTRIAL  PENSION  SYSTEMS 

practical  matter,  have  to  take  care  of  those 
workers  who  have  already  grown  gray  in  his 
service.  This  is  so  universally  the  judgment  of 
authorities  on  the  pension  problem  that  it  is 
hardly  open  to  debate. 

It  is  worth  repeating,  as  noted  in  an  earlier 
chapter,  that  a  benefit  for  "back  service"  cannot 
be  claimed  by  the  worker  under  the  principle  of 
deferred  pay,  but  is  rather  a  matter  of  practical 
expediency.  On  this  point  one  critic  has  well 
said:  ^ 

"The  standing  of  these  employees  as  respects 
their  past  service  is  entirely  different  from  the 
standing  of  employees  who  have  been  included 
in  the  scheme  from  the  commencement  of  their 
employment.  The  holding  out  of  a  pension 
benefit  was  not  an  inducement  for  these  men  to 
enter  the  employment  or  to  remain  in  it.  Hence, 
so  far  as  past  service  is  concerned,  they  may  be 
considered  to  have  received  full  remuneration  for 
services  rendered  and  any  pension  benefit  which 
may  be  granted  must  be  in  the  nature  of  a 
gratuity  or  special  reward  rather  than  of  a  de- 
ferred wage.  But,  in  spite  of  the  fact  that  no 
provision  has  been  made  for  these  men  in  the 
past,  it  will  be  generally  desired  by  the  employer 
to  make  supplementary  grants." 

^J.  H.  Woodward:  Assistant  Actuary,  Equitable  Life  As- 
surance Society  of  U.  S.,  "Industrial  Retirement  Systems  based 
on  the  Money-Purchase  Principle."  Published  in  Economic 
World,  December  3  and   10,  1921. 


COST  OF  PENSION  SYSTEMS  177 

Costs  under  an  Informal  Pension  Policy 

Under  an  informal  policy,  particularly  in  the 
case  of  a  comparatively  small  establishment,  it  is 
possible  to  exercise  considerable  control  over  the 
cost.  Even  here,  however,  costs  will  tend  to  in- 
crease, since  new  pensioners  will  be  added  to  the 
roll  for  many  years  before  all  of  the  original 
entrants  die.  If  an  establishment  fails  to  take 
account  of  this  fact,  its  costs  may  speedily  be- 
come a  burden.  An  employer  adopting  an  infor- 
mal policy  should  carefully  canvass  his  force  at 
the  outset  to  determine  the  number  of  persons 
who  should  be  pensioned  at  once,  and  should  also 
estimate  as  accurately  as  possible  the  probable 
number  of  new  entrants  for  some  years  ahead, 
and  adjust  the  maximum  pension  accordingly. 
In  all  cases,  liberal  allowance  should  be  made  for 
unforeseen  contingencies,  and  it  should  be  kept 
in  mind  that  the  scheme  will  have  to  be  revised 
every  few  years  and  presumably  on  the  basis  of 
an  increased  expenditure.  It  will  be  found  ad- 
visable to  make  a  rough  calculation  of  costs  for, 
say,  ten  years  ahead,  and  check  this  from  year  to 
year  with  the  results  of  actual  experience. 

For  instance,  assume  that  a  company  has  ten 
workers  whom  it  desires  to  pension  at  once,  and 
that  it  may  reasonably  expect  to  add  three  more 


178       INDUSTRIAL  PENSION  SYSTEMS 

to  the  pension  roll  each  year  for,  say,  ten  years, 
and  that  there  will  be  no  deaths  among  pensioners 
during  this  period.  Assume,  further,  that  while 
pensions  will  vary  in  individual  cases,  the  aver- 
age amount  will  be  $200,  $300,  or  $400  respec- 
tively. The  costs  over  a  ten-year  period,  assum- 
ing that  the  estimates  are  not  departed  from, 
would  run  as  follows: 


Table  9.  Illiistration  of  cumulative  increase  in  pension  ouU 
lay  under  an  injornial  pension  policy  on  various  assumed 
bases 


Starting  with  outlay  of 

and 

annual  pension  of 

$2,000 
200 

$3,000 
300 

$4,000 
400 

First  year 

Second     "      

$2,600 
3,200 
3,800 
4,400 
5,000 
5,600 
6,200 
6,800 
7,400 
8,000 

$3,900 

4,800 

5,700 

6,600 

7,500 

8,400 

9,300 

10,200 

11,100 

12,000 

$5,200 
6,400 

Third       "      

7,600 

Fourth     "      

8,800 

Fifth         "      

10  000 

Sixth        "      

11,200 

Seventh   "      

12,400 

Eighth     "      

13,600 

Ninth       "      

14,800 

Tenth      "      

16,000 

Total  

$53,000 
5,300 

$132,500 

$79,500 
7,950 

$198,750 

$106,000 

Average    

10,600 

Fund  required  at  four 
per  cent  simple  inter- 
est, to  produce  such 
an  income 

$265,000 

In  all  probability  there  would  be  a  number  of 
deaths  among  even  this  small  number  of  pen- 
sioners during  such  a  ten-year  period.     In  the 


COST  OF  PENSION  SYSTEMS  179 

early  years  of  the  scheme,  moreover,  there  would 
be  some  interest  accumulation — provided  a  fund 
were  actually  set  aside.  On  the  other  hand,  there 
might  be  an  unexpected  number  of  new  pen- 
sioners. 

While  such  a  calculation  may  be  wide  of  the 
mark,  it  should  nevertheless  be  of  value  in  deter- 
mining for  a  short  period  ahead  the  amount  of 
the  average  pension  to  be  paid,  and  the  number 
of  new  entrants  that  can  be  taken  care  of.  In 
any  event,  such  a  calculation  should  be  useful  in 
showing  an  establishment  some  things  that  it  can- 
not reasonably  expect  to  do.  For  instance,  if, 
in  the  case  assumed,  the  management  feels  that 
the  total  pension  outlay  must  not  exceed  $5,000 
a  year  over  a  ten-year  period,  it  must  keep  the 
average  pension  down.  If  it  finds  that  the  num- 
ber of  new  entrants  exceeds  the  estimated  num- 
ber, it  must  reduce  the  amount  of  pension  either 
in  all  cases  or  in  a  sufficient  number  of  cases  to 
keep  the  average  at  the  amount  originally  deter- 
mined upon.  In  particular,  it  must  avoid  paying 
exceptionally  large  pensions  to  a  few  entrants  as, 
for  instance,  executives  who  had  been  receiving 
large  salaries.  Otherwise,  its  scheme  is  bound  to 
come  to  grief.  In  any  case,  as  already  empha- 
sized, the  scheme  will  have  to  be  revised  at  fre- 
quent intervals. 


180       INDUSTRIAL  PENSION  SYSTEMS 

Need  of  Actuarial  Estimates  in  Establishment  of 
a  Pension  System 

Practically  all  actuaries  and  pension  experts  are 
agreed  that  a  pension  system  should  be  estab- 
lished only  after  expert  actuarial  analysis  of  the 
probable  future  costs. 

The  importance  of  actuarial  estimates  was  em- 
phasized by  the  Special  Committee  of  the  Mer- 
chants' Association  of  New  York  as  follows : 

"The  guidance  necessary  thus  properly  to  es- 
tablish a  pension  system  cannot  be  obtained  in 
the  corporation's  own  staff.  The  problem  is  not 
a  mere  accounting  one;  it  is  of  a  far  more  complex 
and  scientific  order.  The  somewhat  unfortunate 
experience  in  the  United  States  in  regard  to  pen- 
sions has  been  due  to  the  superficial  character  of 
the  investigation  which  has  preceded  the  es- 
tablishment of  most  pension  plans — the  mere 
collection  of  the  rules  of  a  few  previous  plans 
framed  after  similar  superficial  consideration  and 
selections  from  them  arranged  by  persons  unaware 
of  the  fundamental  questions  involved.  Patent 
fallacies,  once  started  in  American  pension  plans, 
have  thus  endlessly  perpetuated  themselves." 

However,  even  with  the  best  of  actuarial  ad- 
vice, forecasts  of  the  ultimate  pension  burdens 
are  involved  in  great  uncertainty.  Indeed,  it  is 
obvious  that  an  estimate  of  future  costs  where 
these  are  subject  not  only  to  possible  changes  in 


COST  OF  PENSION  SYSTEMS  181 

the  character  of  the  personnel,  but  in  rates  of 
wages,  in  longevity,  and  in  stability  of  the  labor 
force,  can  never  be  anything  better  than  careful 
estimates.  A  particular  weakness  of  many  actu- 
arial estimates  is  that  they  are  based  on  the 
assumption  of  a  constant  force,  and  a  continuance 
of  the  existing  rates  of  wages.  Such  assumptions 
obviously  will  not  hold  in  the  case  of  many  com- 
panies. On  the  other  hand,  attempts  to  forecast 
the  probable  increase  in  the  force  or  the  future 
course  of  wages  clearly  must  be  highly  arbitrary 
and  consequently  subject  to  a  wide  margin  of 
error. 

For  these  reasons,  as  already  shown,  it  is  im- 
perative that  the  original  forecasts  be  more  or  lesa 
constantly  supplemented  by  new  estimates,  or 
"revaluations,"  as  they  are  sometimes  called,  in 
order  to  prevent  the  curve  of  disbursements  from 
departing  so  far  from  the  calculated  normal  as 
to  endanger  the  stability  of  the  plan.  It  should 
be  understood  that  these  revaluations  do  not 
mean  necessarily  that  the  original  normal  can  be 
maintained  at  the  same  expense.  However,  if 
departures  from  the  normal  trend  of  expenditures 
as  originally  calculated  can  be  detected  in  time, 
it  may  be  possible  to  correct  them  by  only  a  small 
change  in  the  annual  contribution.  If  this  is  not 
done,  one  of  two  alternatives  must  eventually  bej 


182        INDUSTRIAL  PENSION  SYSTEMS 

faced:  either  a  heavy  increase  in  the  contribu- 
tions, by  a  lump  sum,  or  otherwise;  or  else  a  cur- 
tailment of  the  benefits.  Either  alternative  is,  of 
course,  highly  disadvantageous. 

As  a  matter  of  fact,  even  where  expert  actuarial 
advice  has  been  taken  at  the  outset,  and  where 
plans  have  thus  been  revalued,  unforeseen  con- 
tingencies have  more  or  less  frequently  arisen 
which  have  upset  calculations  and  even  jeopard- 
ized the  financial  stability  of  a  pension  scheme.' 

With  respect  to  the  fallibility  of  actuarial  esti- 
mates the  following  excerpt  from  a  statement  of 
George  King,  one  of  the  leading  actuaries  of  Great 
Britain,  is  of  interest.^ 

"I  agree  that  actuaries  cannot  possibly  predict 
the  future  with  strict  accuracy.  There  are  very 
many  variable  elements  that  have  to  be  taken 
into  account,  and  there  must,  therefore,  be  elas- 
ticity to  keep  the  Fund  solvent,  and  frequent 
actuarial  valuations,  so  that  any  changes  that 
take  place  may  be  dealt  with  in  time,  in  order 
that  there  may  be  no  necessity  for  very  violent 

*  A  striking  instance  of  repeated  deficits  in  a  large  fund, 
despite  fairly  frequent  actuarial  examinations,  is  furnished  by 
the  experience  of  the  British  Railway  Clearing  System  Super- 
annuation Fund,  as  given  in  the  report  of  the  Sub-Committee 
of  the  King  Edward's  Hospital  Fund  for  London.  ("Pensiona 
for  Hospital  Officers  and  Staffs,"  pp.  77-81.) 

■From  testimony  submitted  to  Lord  Southwark's  Committee 
on  Railway  Superannuation  Funds.  Published  in  "Pensions 
for  Hospital  Officers  and  Staffs."  Report  by  a  Sub-Committee 
of  Executive  Committee  of  King  Edward's  Hospital  Fund 
for  London,  Appendix. 


COST  OF  PENSION  SYSTEMS  183 

measures  to  put  matters  right.  A  very  striking 
example,  however,  can  be  brought  forward  to 
show  how  even  the  most  cautious  forecasts  of 
actuaries  may  fail  to  give  stability  and  certainty 
to  a  Fund,  and  that  where  even  extreme  rigidity 
is  instituted  at  the  outset  there  may  be  fluctua- 
tions in  the  working  of  such  a  Fund.  Here  I 
would  put  in  the  valuation  report  of  the  Elemen- 
tary School  Teachers'  Deferred  Annuity  Fund. 
.  .  .  These  contributions  are  treated  as  single 
premiums  to  purchase  deferred  annuities,  to  com- 
mence at  exact  age  sixty-five,  and  the  contribu- 
tions are  not  returnable  under  any  circumstances, 
the  annuities  remaining  to  the  credit  of  the 
teachers,  even  if  they  withdraw  from  the  service. 
Thus  it  appears  that  the  only  uncertain  elements 
in  these  Funds  are  those  of  mortality  and  interest. 
A  table  of  deferred  annuities  was  prepared  under 
the  Act  jointly  by  the  late  Mr.  A.  J.  Finlaison 
and  the  late  Mr.  W.  Sutton,  both  government 
actuaries,  and  they  based  their  calculations  on  the 
Government  Annuitants',  1883,  experience,  at  a 
rate  of  interest  which  is  not  known,  but  which  was 
very  low,  being  less  than  two  and  a  half  per 
cent.  .  .  . 

"It  would  have  been  thought  that  the  basis 
adopted  by  these  eminent  actuaries  was  a  thor- 
oughly safe  one,  and  in  fact  there  had  been  agita- 
tion among  the  teachers,  who  alleged  that  the 
annuities  secured  were  too  small,  and  that  the 
Fund  could  afford  more;  that  the  rate  of  mor- 
tality amongst  teachers  was  higher  than  amongst 
the  government  annuitants,  and  that,  therefore, 
it  was  not  fair  to  employ  that  table  for  the  teach- 


184       INDUSTRIAL  PENSION  SYSTEMS 

ers.  The  Treasury  did  me  the  honor  to  entrust 
to  me  the  first  septennial  valuation;  the  rate  of 
mortality  which  had  prevailed  was  investigated, 
and  it  was  found  that  that  rate  was  so  low  that 
the  calculations  of  the  actuaries  were  altogether 
stultified,  and  that  there  was  a  large  deficiency 
in  each  of  the  Funds — that  for  the  males  and 
that  for  the  females. 

"It  thus  appears  that  even  in  the  case  of  a 
Fund  so  carefully  prepared,  and  established  on 
what  at  the  outset  had  every  appearance  of  ex- 
cessive safety,  there  may  be  great  surprises,  and 
that  the  best  knowledge  and  skill  may  fail  to 
forecast  the  future." 

This  difficulty  of  forecasting  the  ultimate  cost 
is  a  consideration  which  should  be  carefully 
weighed  before  introducing  a  formal  pension  sys- 
tem. Even  in  the  case  of  a  long  established 
concern  with  a  stable  business  and  with  ample 
resources,  conditions  may  arise  which  will  make 
the  pension  load  a  heavy  burden.  Indeed,  in' 
many  cases  this  uncertainty  as  to  cost  may  be  a 
deciding  factor  against  the  introduction  of  a 
formal  pension  plan. 

In  the  case  of  an  annuity  system  of  the  sort 
described  in  Chapter  V,  the  actuarial  uncertain- 
ties are  largely  eliminated  so  far  as  the  employer 
is  concerned.  While  it  is  reasonable  to  expect 
that  the  cost  of  such  a  system  will  gradually 
tend  to  increase,  there  should    be    nothing  ap- 


COST  OF  PENSION  SYSTEMS  185 

preaching  the  tremendous  increase  in  expenditures 
which  nonnally  occurs  under  a  pension  plan. 

The  fact  that  such  an  annuity  system  ordi- 
narily would  be  handled  through  an  insurance 
company  is  objected  to  by  some  employers  on 
the  ground  that  they  can  finance  the  plan  them- 
selves at  less  expense.  This  contention  seems  of 
a  very  doubtful  validity.  A  large  part  of  an  in- 
surance company's  charge  is  applied  to  the  build- 
ing up  of  a  reserve  as  required  by  law.  Ordinarily 
an  insurance  company  should  be  able  to  do  the 
administrative  work  involved  in  an  annuity  sys- 
tem at  less  cost  than  an  industrial  employer 
whose  force  would  be  unfamiliar  with  details  of 
insurance  practice.  A  much  more  important  con- 
sideration is  that  any  one  industrial  establish- 
ment may  encounter  unexpected  losses  through 
accident,  or  otherwise,  that  would  wreck  the 
stability  of  its  plan,  whereas  with  an  insurance 
company  the  losses  of  a  single  establishment  or- 
dinarily would  be  insignificant  when  merged  with 
its  total  risks.  In  any  event,  the  responsibility 
would  properly  rest  with  the  insurance  company. 


CHAPTER  VIII 

COST   OF   A    CUMULATIVE    ANNUITY    SYSTEM 

The  cost  of  a  system  of  paid-up  annuities  of 
the  sort  described  in  Chapter  V,  while  depending 
primarily  upon  the  amount  of  the  benefit  and  the 
general  conditions  imposed,  will  be  influenced 
in  a  very  marked  degree  by  the  rate  of  labor 
turnover.  As  previously  explained,  such  a  sys- 
tem ordinarily  would  not  be  applicable  to  work- 
ers who  had  not  passed  through  the  period  of 
initial  heavy  labor  turnover,  or,  in  other  words, 
workers  who  had  not  already  served  several 
years  in  the  company's  employ.  Even  in  case  of 
the  "stabilized"  portion  of  the  working  force,  as 
it  may  be  called,  however,  there  is  an  appreciable 
labor  turnover,  gradually  becoming  less  as  the  av- 
erage age  of  the  workers,  or  their  average  length 
of  service,  increases. 

Where  the  rate  of  labor  turnover  for  such  sta- 
bilized portion  of  the  working  force  is  normal,  the 
cost  of  a  system  of  paid-up  annuities  such  as  hag( 
been  described  should  not  exceed  the  cost  of  a' 

186 


COST  OF  ANNUITY  SYSTEM  187 

pension  system  providing  the  same  benej&ts.  In- 
deed, as  shown  later,  it  may  be  less. 

Since  the  annuity  policies  become  the  property 
of  the  worker  year  by  year,  even  though  he  should 
become  separated  from  the  service  before  reaching 
old  age,  the  successive  delivery  of  these  policies 
virtually  provides  for  a  withdrawal  equity  or  "re- 
turn of  contributions,"  although  this  equity  is, 
of  course,  on  a  deferred  basis.  Therefore,  the  cost 
of  such  an  annuity  system  should  more  closely  ap- 
proximate the  cost  of  a  pension  system  conferring 
such  withdrawal  equities  than  that  of  a  pension 
system  conferring  a  retirement  benefit  only. 

One  thing  may  be  said  with  reasonable  cer- 
tainty, namely,  that  the  cost  of  such  a  system  of 
annuities  can  be  estimated  with  far  greater  ac- 
curacy than  the  cost  of  a  pension  system.  The 
maximum  cost  for  the  first  year  clearly  would  be 
the  aggregate  cost  of  purchasing  an  annuity  for 
each  member  of  the  force  who  completed  the  re- 
quired period  of  service.  Such  a  computation 
can  be  made  with  almost  absolute  accuracy  for 
the  first  year,^  since  the  ages  of  the  respective 
workers  can  be  ascertained  and  the  cost  of  the 
annuity  policy  at  each  age  is  fixed  in  the  insur- 
ance contract. 

^That  is,  if  made  at  the  close  of  the  year.  If  made  in  ad- 
vance, allowance  would  have  to  be  made  for  probable  deaths 
and  withdrawals. 


188       INDUSTRIAL  PENSION  SYSTEMS 

The  method  of  calculating  the  cost  of  such  an 
annuity  system,  without  provision  for  the  "ac- 
crued liabilities,"  is  illustrated  by  the  following 
table,  based  on  an  assumed  age  distribution  of  a 
group  of  male  workers.  The  policy  on  which  these 
rates  are  based  provides  no  death  or  disability 
benefit.  The  annuity  payments  cease  on  the 
death  of  an  annuitant.  The  cost  might  be  slightly 
reduced  by  the  return  of  a  small  portion  of  the 
premiums,  or  so-called  dividends. 

If  the  cross  section  of  the  working  force  by 
ages  and  years  of  service  remains  constant,  like- 
wise the  rate  of  labor  turnover,  the  cost  of  such 
a  system  in  its  first  year,  not  including  the  "ac- 
crued liabilities,"  would  practically  measure  the 
cost  in  its  twentieth  year,  or  any  other  year.  No 
such  constancy  of  experience,  however,  can  be  as- 
sumed. The  average  age  and  the  rate  of  turn- 
over may  fluctuate,  while  the  number  of  workers 
in  any  given  age  group  may  vary  considerably 
from  year  to  year.  Moreover,  the  system  itself 
may  have  a  tendency  to  increase  the  length  of  ser- 
vice. In  this  case  the  cost  would  increase,  since, 
as  already  shown,  annuities  purchased  for  workers 
of  advanced  ages  cost  much  more  than  those  for 
young  workers.  The  annual  outlay  under  such  a 
system  should,  however,  increase  much  more 
slowly  than  the  annual  outlay  under  a  pension 


COST  OF  ANNUITY  SYSTEM 


189 


Table  10.  Method  of  computing  cost,  for  first  year,  of  paid-up 
annuities  for  %10  each  for  a  group  of  600  male  workers, 
all  of  whom  have  completed  at  least  five  years  of  service. 


Age 

Cost  of  one 

No.  workers  in 

Cost  for 

$10  annuity 

each  group 

each  group 

25 

13.00 

7 

91.00 

26 

13.56 

8 

108.48 

27 

14.15 

8 

113.20 

28 

14.77 

12 

177.24 

29 

15.42 

11 

169.62 

30 

10.10 

17 

273.70 

31 

16.80 

12 

201.60 

32 

17.55 

10 

175.50 

33 

18.32 

18 

329.76 

34 

19.14 

19 

363.66 

35 

19.99 

18 

359.82 

36 

20.89 

14 

292.46 

37 

21.83 

18 

392.94 

38 

22.81 

17 

387.77 

39 

23.85 

19 

453.15 

40 

24.94 

16 

399.04 

41 

26.09 

20 

521.80 

42 

27.30 

17 

464.10 

43 

28.58 

13 

371.S4 

44 

29.92 

17 

508.64 

45 

31.35 

15 

470.25 

46 

32.85 

16 

525.60 

47 

34.45 

14 

482.30 

48 

36.14 

14 

505.96 

49 

37.94 

12 

455.28 

50 

39.85 

13 

518.05 

51 

41.89 

17 

712.13 

52 

44.07 

11 

484.77 

53 

46.41 

11 

510.51 

54 

48.91 

14 

684.74 

55 

51.60 

10 

516.00 

56 

54.51 

6 

327.06 

57 

57.64 

8 

461.12 

58 

61.05 

7 

427.35 

59 

64.74 

8 

517.92 

60 

68.78 

5 

343.90 

61 

73.20 

1 

73J20 

62 

78.06 

9 

702.54 

63 

83.42 

8 

667.36 

64 

89.37 

4 

357.48 

65 

95.53 

6 

573.18 

Totals 

500 

$16,471.72 

190       INDUSTRIAL  PENSION  SYSTEMS 

system,  where  the  immediate  expenditure  is 
smaller,  but  where  the  ultimate  expenditure  many 
years  later  often  becomes  vastly  greater.  As  a 
matter  of  fact,  the  cost  of  an  annuity  plan  may 
remain  fairly  constant  over  a  long  period  of  years. 

In  brief,  while  under  such  a  system  of  annuities 
the  cost  may  tend  to  increase  from  year  to  year, 
it  should  be  possible  to  estimate  the  maximum 
cost  for  several  years  ahead  with  reasonable  ac- 
curacy. Moreover,  if  the  cost  increases  more 
sharply  than  was  anticipated,  policies  could  be 
taken  out  for  smaller  amounts  without  wrecking 
the  financial  value  of  the  scheme  to  the  worker. 

The  question  arises  whether  the  practice  of 
paying  up  such  annuities  in  full  each  year  is  not 
needlessly  expensive,  in  view  of  the  fact  that  a 
considerable  number  of  policies  will  be  purchased 
for  workers  who  will  become  separated  from  the 
service  long  before  reaching  the  retirement  age. 
It  has  been  argued  by  some  that  a  much  less  ex- 
pensive method  would  be  to  take  out  an  annuity 
policy  for  whatever  amount  it  might  be  desired 
to  pay  on  retirement  at  some  given  age — say  age 
sixty-five — and  distribute  the  cost  evenly  over 
a  long  period  on  a  "flat  rate"  basis,  letting  the  in- 
terest accumulations  on  the  early  payments 
largely  provide  the  fund  from  which  the  annuity 


COST  OF  ANNUITY  SYSTEM  191 

would  ultimately  be  paid.  This  point  has  been 
made  by  various  critics  of  the  paid-up  annuity 
plan. 

The  apparent  advantage  of  interest  accumula- 
tion under  such  a  "flat-rate"  annuity  is,  however, 
ofifset  by  the  fact  that  under  the  paid-up  plan 
the  first  policies  can  be  purchased  at  a  cost  not 
only  much  less  than  the  cost  of  those  purchased 
later  in  the  series,  but  at  much  less  than  the  aver- 
age or  "flat-rate"  cost  of  the  entire  series.  There- 
fore, if  both  policies  provide  for  a  withdrawal 
equity,  the  cost  to  the  company  on  the  single 
premium  basis  would  be  less  than  the  cost  under 
a  "flat-rate"  system,  because  many  policies  issued 
to  workers  who  withdraw  will  have  been  pur- 
chased at  relatively  low  cost. 

In  this  connection,  the  following  statement  by 
an  actuary  of  a  large  insurance  company  may  be 
cited : 

"You  ask  as  to  the  relative  cost  to  the  employer 
of  a  series  of  single  premium  paid-up  deferred  an- 
nuities as  compared  with  the  cost  of  a  level 
premium  deferred  annuity.  .  .  .  Assume  an  em- 
ployee now  age  twenty-five  for  whom  it  is  in- 
tended to  provide  a  pension  at  sixty-five;  also  this 
pension  is  to  be  $20  per  annum  for  each  year  of 
service.  This  could  be  purchased  in  two  ways: 
(1)  by  means  of  a  series  of  single  premiums  for 


192       INDUSTRIAL  PENSION  SYSTEMS 

paid-up  deferred  annuities  of  $20  each  to  be  en- 
tered upon  at  age  sixty-five;  or  (2)  by  means 
of  a  level  annual  premium  for  a  deferred  annuity 
of  $800  to  be  entered  upon  at  age  sixty-five. 

"Under  (1)  the  annual  cost  would  commence  at 
a  small  amount  for  a  young  employee  and  increase 
each  year  as  the  age  increased.  Under  (2)  the 
cost  would  be  a  level  amount  from  year  to  year 
and  would  not  increase. 

"If  the  employee  is  allowed  under  both  systems 
the  accrued  value  of  the  contract  at  the  time  of 
withdrawal,  the  cost  under  the  second  system  will 
be  materially  greater  because  of  the  heavier  rate 
of  withdrawal  at  the  earlier  ages. 

"If  no  withdrawal  benefits  of  any  kind  are  al- 
lowed to  the  employee,  the  two  systems  are 
mathematically  equivalent  in  their  costs  to  the 
employer,  the  only  difference  being  that  under 
(2)  the  apparent  cost  would  be  less  because  the 
funds  are  paid  in  earlier  and  earn  interest." 

Problem  of  "Accrued  Liabilities"  under  an  An- 
nuity System 

With  an  annuity  system  of  the  sort  described  in 
Chapter  V  the  problem  of  meeting  the  "accrued 
liabilities"  is  forced  sharply  to  the  front  at  the 
outset,  since  the  purchase  of  one  $10  (or  other 
small)  annuity  each  year  for  those  workers  al- 
ready approaching  the  retirement  age  will  not 
provide  a  substantial  income  at  retirement.    For 


COST  OF  ANNUITY  SYSTEM  193 

example,  a  worker  already  fifty-seven  who  would 
retire  at,  say,  age  sixty-five,  would  have  only 
eight  annuity  policies.  If  these  were  for  $10  each 
the  total  benefit  would  be  only  $80  per  year. 

It  is  a  merit,  rather  than  a  defect,  of  the  annuity 
system  that  provision  for  the  "accrued  liability" 
is  thus  brought  into  the  foreground,  since,  as  al- 
ready made  clear,  failure  adequately  to  meet  this 
problem  has  been  responsible  for  the  shipwreck 
or  reorganization  of  more  than  one  pension  plan. 

There  are  various  ways  in  which  the  "accrued 
liabilities"  may  be  met  under  an  annuity  system. 
One  very  simple  method — although  possibly  a 
needlessly  expensive  one — would  be  to  purchase 
at  once  for  such  older  workers  one  .additional  an- 
nuity for  each  year  of  "back"  service  (beyond  the 
initial  "trial-period")  already  rendered  at  the  time 
the  plan  was  put  into  operation.  For  instance, 
taking  the  illustrative  case  just  cited  above,  if 
a  worker  fifty-seven  years  of  age  at  the  time  the 
annuity  system  was  adopted  had  entered  the  em- 
ploy of  the  company  at  age  twenty,  he  already 
would  have  completed  thirty-seven  years  of  ser- 
vice. If  the  "trial-period"  under  the  plan  was 
five  years,  he  would  have  had  thirty-two  years 
of  "back"  service.  If  the  company  should  pur- 
chase one  annuity  for  each  of  these  thirty-two 
years  of  "back"  service  and  continue  to  purchase 


194       INDUSTRIAL  PENSION  SYSTEMS 

one  annuity  each  year  until  he  reached  age  sixty- 
five,  he  would  have  on  retirement  not  eight,  but 
forty,  annuity  policies.  If  each  of  these  assured 
him  an  income  of  $10  for  the  rest  of  his  life,  he 
would  have  an  annual  income  of  $400.  The  cost 
of  such  policies  to  cover  "back"  service  would, 
of  course,  be  governed  by  the  age  of  the  worker 
at  the  time  they  were  purchased,  and  the  total 
first  cost  would  be  very  much  greater  than  if  they 
had  been  purchased  year  by  year  beginning  at 
age  twenty-five. 

Computations  made  by  one  establishment  in- 
dicated that  the  cost  of  meeting  the  "accrued  lia- 
bilities" in  this  way  would  be  approximately  ten 
times  the  cost  the  first  year  of  buying  one  annuity 
for  every  worker  on  the  payroll  with  over  five 
years  of  service.  Or,  to  use  hypothetical  figures, 
if  the  cost  of  purchasing  one  $10  annuity  for  every 
worker  on  the  payroll  with  over  five  years  of  ser- 
vice were  $50,000,  then  the  cost  of  meeting  the 
"back"  annuities  in  this  case  would  have  been 
approximately  $500,000.  These  ratios  cannot  be 
regarded  as  generally  applicable,  since  the  dis- 
tribution by  ages,  the  proportion  of  men  and 
women  on  the  force,  and  the  rates  of  labor  turn- 
over, will  very  greatly  afi'ect  the  result.  The  il- 
lustration may,  however,  afford  some  idea  of  the 


COST  OF  ANNUITY  SYSTEM  195 

relative  cost  of  meeting  the  "accrued  liability"  in 
this  way. 

The  "accrued  liability"  under  an  annuity  sys- 
tem probably  could  be  met  at  somewhat  less  ex- 
pense in  the  case  of  workers  approaching  the  re- 
tirement age  by  deferring  the  purchase  of  ad- 
ditional annuities  for  back  service  until  their  re- 
tirement actually  took  place.  While  the  imme- 
diate cost  of  annuities  so  deferred  would  be  some- 
what greater  at  the  higher  age  then  attained,  the 
real  cost,  for  reasons  already  explained,  would 
be  about  the  same.  If,  in  the  meantime,  any  of 
these  workers  were  to  die — and,  in  the  case  of  a 
large  establishment,  a  number  certainly  would 
— leaving  no  dependents,  the  company  could  thus 
save  the  cost  of  such  Annuities  for  back  service, 
at  least  in  many  cases.  (If  such  workers  left  de- 
pendents, it  is  true  that  the  company  might  feel 
disposed  to  do  something  for  these.)  Again, 
some  of  these  older  workers  might  voluntarily 
quit  the  company's  service,  and  the  management 
might  justly  take  the  ground  that  it  was  under 
no  real  obligation  to  make  the  plan  retroactive  in 
such  cases,  at  least  as  a  universal  practice. 

In  these  and  in  other  ways  it  is  possible  that 
the  cost  of  meeting  the  "accrued  liabilities"  could 
be  reduced  from  the  amount  required  to  purchase 


196       INDUSTRIAL  PENSION  SYSTEMS 

annuities  representing  every  year  of  back  service 
(beyond  the  stipulated  "trial  service  period")  im- 
mediately upon  the  adoption  of  the  annuity  plan. 

It  might  be  argued  that  if  such  postponement 
of  the  purchase  of  annuities  was  wise  in  the  case 
of  present  workers  of  advanced  years,  then  the 
purchase  of  annuities  should  in  all  cases  be  de- 
ferred until  retirement.  This  suggestion  is  en- 
tirely in  conflict  with  the  fundamental  concept 
of  the  annuity  system.  A  particular  feature  of 
the  annuity  system  is  its  immediate  appeal  to 
the  worker  and  its  definite  assurance  that  each 
year  of  faithful  service  will  be  rewarded  at  the 
time  by  an  additional  annuity  policy.  In  this 
respect  the  annuity  system,  as  already  shown,  is 
greatly  superior  to  the  ordinary  pension  system, 
where  the  worker  has  merely  the  promise,  and 
at  times  a  very  uncertain  promise,  of  a  retirement 
benefit  until  he  actually  enters  on  the  pension 
roll.  It  is  largely  because  of  this  assurance  that 
the  annuity  system  may  be  expected  to  reduce 
labor  turnover. 

Even  the  immediate  purchase  of  annuities  to 
represent  back  service  in  every  case,  however,  ap- 
parently would  be  no  more  expensive  than  the 
provision  for  "accrued  liabilities"  under  a  pen- 
sion plan.  Indeed,  in  view  of  the  fact  that  many 
workers  at  the  time  an  annuity  system  is  estab- 


COST  OF  ANNUITY  SYSTEM  197 

lished  would  have  only  a  few  years  of  "back" 
service  to  their  credit,  there  is  very  strong  ground 
for  the  opinion  that  the  cost  of  meeting  the  "ac- 
crued liabilities"  in  this  way  would  be  substan- 
tially less  than  the  cost  of  meeting  them  under 
a  formal  pension  system.  In  comparing  the  costs 
under  the  two  systems,  however,  it  should  be  kept 
in  mind  that  they  do  not  aim  to  produce  iden- 
tical results.  The  cumulative  annuity  system  is 
essentially  a  "reward-of-service"  system,  and  the 
total  annuity  at  retirement  is  dependent  on  the 
number  of  annuity  policies  accumulated,  rather 
than  on  the  amount  needed  to  support  the  worker 
in  old  age.  It  may  be  noted,  moreover,  that  the 
"trial  service"  period  contemplated  in  the  case  of 
a  cumulative  annuity  system  would  affect  such  a 
comparison  of  costs. 

One  practical  consideration  under  such  an  an- 
nuity system  is  that  workers  joining  the  force  at, 
say,  age  forty-five,  and  retiring  at,  say,  age  sixty- 
five,  would  not  secure  a  large  total  income  on  the 
basis  of  a  $10  annuity  for  each  year  of  service  in 
excess  of  five.  Any  tendency  to  depart  from  the 
plan  and  purchase  more  annuities  for  such  work- 
ers will,  of  course,  increase  the  cost.  Yet  there 
doubtless  will  be  cases  where  the  employer  will 
feel  disposed  to  do  this. 

If  such  an  annuity  system  were  in  general  use 


198       INDUSTRIAL  PENSION  SYSTEMS 

in  industry,  this  diflBculty  would  largely  be  obvi- 
ated, since  workers  coming  on  the  force  at,  say, 
age  forty-five,  presumably  would  already  have 
earned  several  annuity  policies  by  prior  service 
elsewhere,  so  that  the  last  employer  need  consider 
only  the  number  of  years  of  service  actually  ren- 
dered him.^  In  the  case  of  chronic  "floaters"  the 
aggregate  number  of  annuities  earned  might  be 
negligible.  The  responsibility  for  this,  however, 
could  not  fairly  be  placed  on  the  employer. 

A  very  great  advantage  in  providing  for  the 
"accrued  liabilities"  under  the  annuity  system  is 
that  the  cost  can  be  definitely  figured  at  the  time. 
If  the  company  is  able  to  meet  this  cost  at  once, 
or  to  meet  it  during  a  brief  period  of,  say,  five  or 
ten  years,  the  plan  has  a  very  great  attractiveness, 
as  against  leaving  these  "accrued  liabilities"  to 
interfere  with  the  normal  operation  of  the  plan. 

From  the  standpoint  of  the  "accrued  liabilities," 
therefore,  as  in  numerous  other  respects,  the  an- 
nuity system  appears  to  have  a  decided  advan- 
tage over  the  ordinary  pension  system. 

^In  the  case  of  workers  of  advanced  ages  it  might  be  prac- 
ticable to  shorten  the  "trial  period." 


CHAPTER  IX 

BENEFITS  TO  BE  INCLUDED  IN  A  PENSION  OR 
ANNUITY  SYSTEM 

Once  an  industrial  employer  has  decided  to  in- 
troduce a  pension  or  annuity  system,  his  first 
problem  is  to  determine  what  benefits  shall  be 
provided. 

It  should  be  emphasized  that  a  pension  in  a 
strict  sense  is  a  retirement  benefit,  to  be  paid  to 
workers  no  longer  able  to  perform  their  tasks,  or 
who  have  rendered  a  given  measure  of  service. 
Death  benefits,  and  even  disability  benefits  where 
the  disability  occurs  prior  to  superannuation,  are 
insurance  features  quite  distinct  from  a  pension 
proper.  A  withdrawal  equity  is  in  the  nature  of 
a  surrender  value  in  an  insurance  policy.  All 
these  collateral  features  necessarily  increase  the 
cost  of  a  retirement  system.  This,  of  course,  does 
not  necessarily  condemn  them,  but  their  character 
should  be  understood. 

The  following  statement  by  a  prominent  Brit- 
ish actuary  may  be  cited  in  this  connection: 

199 


200       INDUSTRIAL  PENSION  SYSTEMS 

"Returns  of  contributions  in  the  event  of  death 
are  simply  insurances,  and  must  be  paid  for  like 
any  other  insurance.  The  more  the  system  of 
making  returns  of  contributions  is  extended,  the 
more  does  the  character  of  the  institution  depart 
from  that  of  a  pension  fund,  and  approach  that 
of  a  savings  bank."  ^ 

While,  however,  the  technical  significance  of 
the  term  pension  is  thus  restricted,  it  may  safely 
be  asserted  that  an  employer  who  inaugurates  a 
pension  system  will  be  disappointed  if  it  does 
not  include  some  benefits  in  addition  to  pensions 
proper.  At  least  the  following  should  be  pro- 
vided either  in  the  retirement  plan  or  in  some  col- 
lateral plan  Like  group  insurance. 

1.  A  retirement  benefit  in  the  form  of  a  pen- 
sion or  an  annuity  commencing  at  superannuation 
and  payable  in  monthly  or  reasonably  frequent  in- 
stallments. 

2.  A  total  disability  benefit  commencing  when- 
ever the  disability  occurs,  except  as  provided  for 
under  workmen's  compensation. 

3.  A  death  benefit,  the  value  possibly  increas- 
ing with  years  of  service  rendered. 

4.  A  withdrawal  equity  in  case  of  separation, 
the  value  also  increasing  with  years  of  service.^ 

*  James  J.  M'Lauchlan.  "The  Fundamental  Principles  of 
Pension  Funds":  Transactions  of  the  Faculty  of  Actuaries, 
Vol.  IV,  No.  41,  p.  224. 

"In  the  case  of  a  cumulative  annuity  system,  such  a  with- 
drawal equity,  on  a  deferred  basis,  is  inherent  in  the  plan. 


SCHEME  OF  BENEFITS  201 

While  many  other  features  can  be  added,  such 
a  schedule  of  benefits  fairly  meets  the  require- 
ments of  a  retirement  plan.  Moreover,  there  is 
much  to  be  said  in  favor  of  limiting  benefits  to 
such  a  schedule. 

The  Retirement  Benefit 

The  inclusion  of  a  retirement  benefit  calls  for 
no  discussion.  This  is,  of  course,  the  primary 
consideration.  The  desirability  of  making  this 
payable  in  monthly  or  other  frequent  installments, 
however,  may  be  emphasized.  Under  some  plans 
a  worker,  on  retirement,  is  permitted  to  take  the 
accumulated  value  of  the  benefit  in  a  lump  sum. 
While  in  a  few  cases  this  may  be  advantageous 
to  the  recipient,  as  a  general  rule  it  is  almost  cer- 
tain to  prove  unwise.  Workers  who  thus  take  a 
lump  sum  payment  will  be  inclined  to  risk  it  in 
investments  at  an  age  when  they  neither  are  fitted 
nor  can  afford  to  take  such  chances.  Moreover, 
they  become  the  marked  victims  of  unscrupulous 
promoters  with  doubtful  schemes  to  offer  or  doubt- 
ful securities  to  sell.  Indeed,  if  one  purpose  of 
an  employer  in  establishing  a  pension  system  is 
to  assure  workers  of  a  means  of  support  in  old 
age,  it  seems  imperative  that  the  payments  be 
made  in  regular  installments  and  not  on  a  lump- 
sum basis. 


202       INDUSTRIAL  PENSION  SYSTEMS 

It  seems  exceedingly  desirable,  moreover,  in  the 
case  of  workers  who  die  shortly  after  going  on 
the  pension  roll,  that  such  a  retirement  benefit 
be  paid  to  their  estates  until  the  accrued  value  of 
the  equity  has  been  exhausted.  Under  some 
plans,  only  one  monthly  payment  is  made  to  the 
estates  of  such  annuitants.  While  such  a  prac- 
tice can  be  defended,  it  is  in  the  nature  of  a 
tontine  arrangement.  It  is  true  that  a  guarantee 
of  some  stipulated  number  of  payments  to  the 
estate  of  a  pensioner  who  thus  dies  before  his 
equity  is  exhausted  will  add  materially  to  the  cost 
of  a  plan.  Nevertheless,  such  a  guarantee  seems 
desirable.  Otherwise,  a  worker  who  has  depended 
on  his  pension  to  support  his  wife  or  other  mem- 
bers of  his  family  in  old  age  may  leave  them  com- 
pletely unprovided  for  in  the  event  of  his  death. 
Where  a  plan  is  on  a  contributory  basis,  it  is  only 
reasonable  that  the  equity  built  up  by  the  work- 
er's contribution  shall  thus  be  paid  out  to  his  es- 
tate in  the  event  of  his  death.  Indeed,  as  already 
made  clear,  under  a  contributory  system,  the  em- 
ployees will  almost  certainly  demand  that  the 
accrued  value  of  their  equity  be  thus  returned. 
As  repeatedly  pointed  out  in  this  report,  the 
argument  holds  with  equal  force  under  a  non- 
contributory  system  to  the  extent  that  the  de- 
ferred-pay theory  has  been  applicable. 


SCHEME  OF  BENEFITS  203 

The  Total  Disability  Benefit 

The  inclusion  in  the  retirement  system  of  a 
total  disability  benefit  is  easily  justified.  The 
moment  a  worker  is  totally  incapacitated  he  is 
financially  helpless,  and  provision  against  this 
contingency  as  part  of  a  retirement  scheme  is  en- 
tirely logical.  Moreover,  the  increase  in  cost 
ordinarily  is  relatively  small.  To  the  extent  that 
such  permanent  incapacitation  is  already  pro- 
vided for  through  Workmen's  Compensation  Acts, 
duplication  of  benefits  through  a  retirement  plan 
may,  of  course,  be  avoided. 

While,  however,  a  total  disability  benefit  is  a 
desirable  feature  of  any  retirement  scheme,  in 
the  case  of  a  system  of  paid-up  annuities  like 
that  discussed  in  Chapter  V  there  are  strong  ar- 
guments in  favor  of  providing  this  benefit  through 
a  separate  policy  rather  than  in  the  annuity 
policy  itself.  Otherwise  (since  the  annuity  poli- 
cies would  be  retained  by  the  worker  in  case  he 
left  the  service)  an  employer  might  be  insuring 
workers  against  future  disabilities  which  had  no 
relation  to  their  service  for  him. 

The  Death  Benefit 

Opinions  difi'er  as  to  whether  a  retirement  plan 
should  provide  a  death  benefit,  but  the  weight 


204       INDUSTRIAL  PENSION  SYSTEMS 

of  argument  is  strongly  in  favor  of  its  inclusion, 
either  directly  in  the  plan,  or  by  some  collateral 
plan  of  insurance.  It  seems  reasonably  clear  that 
a  worker  with  a  family  of  young  children  will  be 
far  more  disturbed  over  the  possibility  of  their 
being  left  helpless  when  he  is,  perhaps,  their  sole 
support,  than  over  his  own  dependency  late  in  life 
when,  perhaps,  the  same  children  will  be  able  to 
assist  him.  In  any  event,  it  seems  apparent  that 
a  worker  should  reasonably  expect  a  death  benefit 
equal  at  least  to  that  which  he  could  secure  as  a 
withdrawal  benefit  by  a  voluntary  separation 
from  the  service.  Indeed,  a  death  benefit  should 
be  much  greater  than  his  withdrawal  equity, 
where  death  occurs  before  the  worker  has  reached 
an  advanced  age;  otherwise  it  may  be  too  small 
to  be  of  real  value.  In  any  case,  however,  such  a 
death  benefit  will  make  only  temporary,  or  par- 
tial, provision  for  dependents,  but,  again,  the 
rest  of  the  burden  may  fairly  be  placed  upon 
society. 

In  general,  it  seems  advisable  to  cover  the  death 
hazard  by  a  separate  arrangement  as,  for  in- 
stance, group  insurance.  This  is  especially  true 
in  the  case  of  a  system  of  paid-up  annuities,  for 
the  same  reasons  as  just  noted  in  the  discussion 
of  a  disability  benefit.    Since  under  an  annuity 


SCHEME  OF  BENEFITS  205 

system  the  benefits  would  go  to  the  worker  even 
though  he  became  separated  from  the  service,  the 
inclusion  of  these  benefits  in  the  policy  might 
mean  that  an  employer  would  be  expending  funds 
to  cover  hazards  incurred  by  the  worker  later,  in 
the  service  of  another  establishment.  It  is  not 
reasonable  to  expect  an  employer  to  do  this. 
Under  an  annuity  system  the  retirement  benefit, 
however,  runs  pro  rata  with  the  service  rendered 
for  the  given  establishment. 

While  much  might  be  said  in  favor  of  a  uniform 
death  benefit  for  all  workers,  on  the  whole  it  seems 
reasonable  that  this  benefit  should  increase  mod- 
erately in  proportion  to  the  years  of  service  ren- 
dered up  to  some  given  limit.^ 

The  exclusion  of  a  death  benefit  from  a  pen- 
sion plan  can  be  defended,  but  the  arguments  in 
favor  of  its  inclusion  appear  to  be  convincing. 

One  writer  has  described  the  objections  to  state 

*  The  scale  of  death  benefits  provided  by  the  pension  plan  of 
one  large  industrial  company  is  as  follows,  with  a  minimum  of 
1500  and  a  maximum  of  $2,000. 

For  1  year's  service,  3  months'  full  pay. 

For  2  years'  service,  5  months'  full  pay. 

For  3  years'  service,  7  months'  full  pay. 

For  4  years'  service,  9  months'  full  pay. 

For  5  years'  service  and  over,  12  months'  full  pay. 

Some  such  schedule  of  death  benefits  is  not  uncommon  in 
pension  plans.  Often,  however,  the  death  hazard  is  covered  by 
group  insurance. 

In  many  plans  no  death  benefit  is  provided. 


206       INDUSTRIAL  PENSION  SYSTEMS 

pension  systems  without  a  death  benefit,  in  a  pic- 
turesque manner,  as  follows: 

"It  is  obvious  that  the  State  gambles  with  its 
employee  for  his  wage.  I  will  give  you  a  portion 
of  your  wage  as  you  earn  it;  the  remainder  we 
will  toss  for  when  I  am  finished  with  you.  You 
yourself  are  the  coin,  with  life  on  one  side  and 
death  on  the  other.  Live  you  win;  die  you  lose. 
It  is  merely  a  case  of  robbing  Peter  to  pay  Paul, 
but  Peter  suffers  none  the  less.  What  happens  is 
somewhat  as  follows:  Peter  dies  before  he  is  pen- 
sionable. The  total  deductions  made  by  the  Gov- 
ernment for  the  marketable  value  of  his  labors 
on  account  of  the  pension  thereupon  become  lost 
to  his  dependents  who,  by  reason  of  the  early  loss 
of  Peter's  wage-earning  capacity,  need  it  more 
than  if  he  had  lived — and  go  instead  to  make  up 
Paul's  pension  when  he  retires,  whose  dependents, 
by  reason  of  Paul's  two  hands  being  still  avail- 
able, need  it  perhaps  less  than  do  the  defrauded 
relicts  of  Peter."  ^ 

The  Withdrawal  Equity 

The  arguments  in  favor  of  a  withdrawal  equity 
have  already  been  discussed  in  connection  with 
the  question  of  deferred  pay.  Under  a  contribu- 
tory plan,  common  justice  requires  the  provision 
for  a  withdrawal  benefit  representing  at  least  the 

'  Michael  Peters.  "The  Mischief  of  Pensions."  The  Gentle- 
man's Magazine,  London,  August,  1907,  pp.  113-114. 

See  also  Meriam.  "Principles  Governing  the  Retirement  of 
Public  Employees,"  p.  234. 


SCHEME  OF  BENEFITS  207 

net  ^  contribution  of  the  worker  to  the  scheme, 
plus  interest. 

As  already  pointed  out,  to  the  extent  that  the 
deferred-pay  theory  holds,  it  is  difficult  to  escape 
the  conclusion  that  the  worker  is  entitled  to  with- 
draw the  employer's  contribution  as  well  as  his 
own,  subject  to  the  limitations  noted  below. 

Moreover,  to  the  extent  that  the  deferred-pay 
principle  is  operative,  a  withdrawal  equity  should 
similarly  be  recognized  under  a  non-contributory 
system.  Such  return  of  employer's  contribution  is, 
however,  extremely  rare,  even  under  a  contribu- 
tory system.  Nevertheless,  the  argument  in  favor 
of  it  is  very  strong.  It  may  be  noted  that  the  sys- 
tem of  paid-up  annuities  clearly  accepts  this  prin- 
ciple, since  each  annuity,  when  purchased,  at 
once  becomes  the  absolute  property  of  the  worker, 
regardless  of  whatever  proportion  of  the  cost  may 
have  been  borne  directly  by  the  employer. 

*A  withdrawal  benefit,  it  should  be  noted,  may  not  neces- 
sarily equal  the  total  contribution  of  the  worker,  plus  interest, 
since,  where  death  and  disability  benefits  are  provided,  a 
proper  proportion  of  the  worker's  contribution  may  be  re- 
garded as  a  charge  for  protection  against  these  hazards.  Thus, 
one  writer  says: 

"The  amount  returned  in  event  of  resignation  or  dismissal 
in  a  wholly  contributory  system  may  with  full  and  complete 
justice  to  the  employee  be  less  than  the  total  amount  of  con- 
tributions with  interest,  if  any  of  the  benefits  are  in  the  nature 
of  insurance  against  risks  such  as  death  or  disability,  against 
which  the  employee  has  been  protected  during  his  period  of 
service  and  for  which  protection  already  received  he  should 
pay." — Lewis  Meriam.  "Principles  Governing  the  Retirement 
of  Public  Employees,"  p.  231. 


208       INDUSTRIAL  PENSION  SYSTEMS 

Sickness  Benefit  Inadvisable 

Some  pension  systems  also  provide  sickness 
benefits  and  benefit-s  to  widows  or  dependent  chil- 
dren. The  weight  of  argument  is,  however,  against 
this.  It  is  true  that  sickness  is  one  of  the  major 
hazards  before  the  industrial  worker  and,  more- 
over, one  of  the  principal  causes  of  dependency. 
It  is  also  true  that  the  possibility  of  loss  of  wages 
as  a  result  of  sickness  or  unemployment  is  re- 
garded by  the  average  worker  with  far  more  con- 
cern than  the  possibility  of  dependency  in  old 
age,  or  the  possibility  of  premature  death.  Even 
if  it  be  conceded,  however,  that  some  cooperative 
scheme  for  meeting  the  sickness  hazard  is  desir- 
able, it  will  ordinarily  be  found  inadvisable  to 
include  such  a  provision  within  a  pension  plan. 
Where  a  pension  plan  is  financed  wholly  or  chiefly 
by  the  employer  there  is  grave  danger  that  the 
inclusion  of  a  sickness  benefit  will  lead  to  ma- 
lingering, while  the  possibility  of  violent  increases 
in  expenditures  because  of  epidemics  or  for  other 
reason  tends  to  jeopardize  the  security  of  the 
pension  itself,  the  protection  of  which  is  of  prime 
importance. 

Much  may  be  said  in  favor  of  sickness  benefit 
schemes  financed  by  mutual  associations  of  em- 
ployees themselves,  either  with  or  without  any 


SCHEME  OF  BENEFITS  209 

direct  assistance  from  the  employer.  This  matter 
need  not  be  discussed  here,  further  than  to  say 
that  it  should  be  treated  as  a  problem  separate 
from  the  problem  of  pensions. 

Provision  for  Widows  and  Children  Impracticable 

Specific  provision  for  widows  and  dependent 
children  cannot  reasonably  be  expected  of  an  or- 
dinary pension  plan.  Industry  cannot  provide 
against  all  the  hazards  of  life.  Moreover,  the 
private  employer  may  with  justice  take  the  ground 
that  his  criterion  should  be  the  service  rendered 
and  not  the  number  of  an  employee's  dependents. 
To  the  extent  that  a  return  of  contributions  in 
the  event  of  death  is  provided,  some  provision, 
though  small,  is  in  fact  made  for  dependents.' 
It  is,  as  already  stated,  reasonable  to  provide 
that  a  retirement  benefit  shall  continue  to  go  to 
the  estate  of  a  pensioner  who  dies  shortly  after 
going  on  the  pension  roll,  until  the  net  value  of 
the  pension  earned  or  accumulated  up  to  the  time 
of  his  retirement  had  been  paid  out.  Some  such 
provision  seems  only  just;  otherwise  the  plan  as- 
sumes a  tontine  character.  While  such  a  provision 
may  result  in  a  substantial  benefit  to  dependents, 
it  would  not  be  contingent  upon  the  length  of 
their  lives  or  upon  the  length  of  time  during  which 
they  might  need  assistance  but,  instead,  would  be 


210       INDUSTRIAL  PENSION  SYSTEMS 

measured  by  the  value  of  the  equity  v/hich  the 
worker  had  built  up  by  his  service.  Beyond  this, 
provision  for  dependents  may  properly  be  re- 
garded as  the  concern  of  society  as  a  whole,  rather 
than  that  of  a  private  retirement  scheme. 

In  this  connection  it  may  be  noted  that  where 
a  plan  includes  provision  for  the  dependents  of  a 
worker  it  usually  happens  that  in  time  these  will 
constitute  a  larger  proportion  of  the  total  num- 
ber of  pensioners  than  will  the  workers  them- 
selves. This  experience  has  been  common  in  the 
case  of  public  service  pensions  of  long  standing. 

Amount  of  Benefit 

Having  decided  upon  the  character  of  the  bene- 
fits to  be  included,  the  next  step  is  to  determine 
upon  their  amount  and  the  method  of  arranging 
them. 

With  respect  to  the  retirement  allowance 
proper,  the  best  opinion  is  in  favor  of  moderate 
benefits.  One  strong  argument  in  favor  of  this 
is  the  practical  consideration  of  cost.  A  further 
point  is  that  the  benefit  should  not  be  so  large 
as  to  induce  men  amply  able  to  work  to  cease 
productive  activity.  As  pointed  out  on  page  27 
a  pension  should  not  be  regarded  as  a  means  of 
affording  men  approaching  old  age  an  oppor- 
tunity for  extended  idleness. 


SCHEME  OF  BENEFITS 


211 


A  common  practice  is  to  provide  pensions  of 
anywhere  from  $18  to  $30  a  month  for  workers 
who  ordinarily  will  not  go  on  the  pension  roll 
until,  say,  sixty-five  years  of  age.  Some  years 
ago  pensions  of  $12  a  month  were  not  uncommon, 
but  there  has  been  a  tendency  to  increase  the 
minimum,  which  ordinarily,  where  one  is  named, 
is  not  less  than  $20  a  month. 

The  minimum  pension  stipulated  in  several 
plans  which  contain  such  a  provision  is  as  fol- 
lows: 

American  Smelting  &  Refining  Co.  $20  per  month 

American  Sugar  Refining  Co 20 

Case  (J.  I.)  Threshing  Machine  Co.    18 

Cleveland  Cliffs  Iron  Co 18 

Colorado  Fuel  &  Iron  Co 20 

Crane  Co 30 

Crompton  &  Knowles  Loom  Works  15 

Deere  &  Co 18 

Diamond  Match  Co 25 

International  Harvester  Co 30 

Pittsburgh  Coal  Co 20 

Standard  Sanitary  Mfg.  Co 20 

U.   S.   Steel  &  Carnegie  Pension 

Fund 12    "      " 

The  pension  plans  of  the  above  companies  are 
of  the  non-contributory  type.  The  minimum  al- 
lowances— and  maximum  figures — for  several 
other  companies  and  for  some  other  types  of  plan 
will  be  found  in  the  Appendix. 


212       INDUSTRIAL  PENSION  SYSTEMS 

In  a  large  number  of  eases  the  pension  is  de- 
pendent upon  the  final  wage,  or  on  the  average 
wages  for  the  last  five  or  ten  years  of  service.  A 
common  practice  is  to  allow  one  per  cent  or  more 
of  such  final  wage  for  every  year  of  service.  This 
method,  it  will  be  seen,  tends  to  make  allowances 
for  different  lengths  of  service  and  also  for  dif- 
ferences in  the  wage  status  of  the  recipients. 
While  both  these  features  may  be  highly  desirable, 
this  method  of  calculation  is  a  very  dangerous  one, 
and  objectionable.  The  danger  is  well  illustrated 
by  the  great  increase  in  wages  which  has  taken 
place  in  recent  years  as  a  result  of  the  dis- 
turbances caused  by  the  World  War.  The  use  of 
the  final  wage  or  average  wage  for,  say,  five  or 
ten  years  injects  a  very  serious  element  of  insta- 
bility into  the  pension  plan.  It  also  obviously 
tends  to  produce  inequality  as  between  different 
pensioners.  For  instance,  under  such  an  arrange- 
ment pensioners  who  have  gone  on  the  rolls  since 
the  war  period  will  draw  much  heavier  benefits 
than  was  originally  contemplated.  It  is  entirely 
safe  to  predict  that  this  will  force  a  radical  re- 
organization of  more  than  one  pension  plan  now 
in  operation. 

Instead  of  basing  the  pension  on  the  final  wage, 
or  an  average  of  wages,  a  much  safer  method  is  to 
base  the  contribution  on  the  wages  received  dur- 


SCHEME  OF  BENEFITS  213 

ing  the  accumulation  period,  and  let  the  amount 
of  such  contributions  as  accumulated  under  the 
compound  interest  principle  determine  the  bene- 
fit when  the  pensioner  actually  enters  upon  the 
pension  roll.  An  objection  to  this  method  is  that 
the  worker  cannot  know  in  advance  just  what 
his  pension  will  be.  But  at  least  he  can  estimate 
the  amount  with  some  degree  of  accuracy.  In 
any  event  the  worker  is  better  off  with  the  cer- 
tainty of  a  substantial  payment  than  with  a  pros- 
pect that  the  plan  may  be  so  radically  reorganized 
as  to  practically  shut  him  out  of  any  benefit 
whatever,  as  has  sometimes  happened.  It  may 
be  noted  that  such  a  scheme  of  basing  contribu- 
tions on  the  wages  received  while  the  fund  is 
being  built  up  takes  account  both  of  differences  in 
wage  status  and  in  length  of  service. 

A  system  of  paid-up  annuities  such  as  that  out- 
lined in  Chapter  V  has  a  distinct  advantage  in 
this  respect,  since  the  amount  of  the  annuity 
secured  by  each  year  of  service  is  definitely  guar- 
anteed by  the  insurance  company  underwriting 
the  plan.  The  aggregate  amount  is,  moreover,  di- 
rectly proportional  to  the  length  of  service  ren- 
dered. 

Such  an  annuity  system  can  be  made  to  take 
account  of  differences  in  wages  by  providing,  in- 
stead of  a  uniform  yearly  annuity  for  all  workers, 


214       INDUSTRIAL  PENSION  SYSTEMS 

that  the  amount  shall  be  whatever  a  given  per- 
centage of  the  current  year's  wage  will  buy.  This 
involves  a  considerable  administrative  burden, 
however,  and  insurance  companies  prefer  to  write 
their  annuities  in  round  amounts.  A  simple 
method  of  making  an  approximate  recognition  of 
differences  in  wages  would  be  to  classify  workers 
into  wage  groups,  with  a  uniform  annuity  for 
workers  coming  within  a  given  group  but  varying 
as  between  different  groups. 

As  a  matter  of  fact,  there  is  considerable  to  be 
said  in  favor  of  disregarding  the  amount  of  wages 
earned  in  fixing  annuities  and  letting  these  vary 
only  with  the  length  of  service  rendered. 

Arbitrary  Retirement  Age  Objectionable 

Another  common,  but  objectionable,  practice  in 
many  pension  plans  is  to  fix  an  arbitrary  age  of 
retirement,  either  at  the  option  of  the  worker  or 
at  the  option  of  the  company.  A  more  desirable 
arrangement  is  to  make  the  retirement  age  sub- 
ject to  the  discretion  of  a  pension  committee, 
provided  there  is  adequate  guarantee  that  the 
worker's  rights  will  be  protected.  If  a  worker  is 
fully  able  to  perform  his  task  there  is  no  real 
reason  for  retiring  him  simply  because  he  has 
reached,  say,  age  sixty  or  sixty-five.  Ordinarily 
his  wages,  even  at  that  age,  wiU  be  considerably 


SCHEME  OF  BENEFITS  215 

larger  than  his  pension,  while,  moreover,  it  is 
desirable,  both  from  his  standpoint  and  from  the 
standpoint  of  society,  that  he  should  continue  to 
be  a  producer  as  long  as  he  is  able  to  do  so.  In 
this  connection  it  may  be  noted  that  most  work- 
ers of  from  sixty  to  sixty-five  years  of  age  prefer 
to  continue  on  the  payroll  rather  than  to  go  on 
the  pension  roll.  Instances  are  very  numerous 
where  workers  have  protested  against  being 
placed  on  the  pension  roll  at  a  stipulated  age  or 
where,  having  been  placed  on  the  pension  roll, 
they  have  asked  for  reinstatement  on  the  payroll. 

Where  a  retirement  age  is  stipulated  there  is 
much  to  be  said  in  favor  of  making  it  fairly  high, 
say,  sixty-five  years  in  the  case  of  males,  with 
provision  for  earlier  retirement  if  the  worker  be- 
comes incapacitated.  Aside  from  the  desirability 
of  allowing  the  worker  to  continue  on  the  payroll 
as  long  as  he  is  able  to  perform  his  work  effi- 
ciently, is  the  important  question  of  cost. 

A  good  illustration  of  the  increased  cost  of  a 
pension  system  as  a  result  of  lowering  the  age  of 
retirement  is  afforded  by  the  following  table  sub- 
mitted to  the  Executive  Committee  of  the  United 
States  Civil  Service  Retirement  Association  by 
actuaries  of  the  New  York  Life  Insurance  Com- 
pany in  1902,  the  rates  being  applicable  to  a  given 
pension  for  the  salary  group  under  consideration. 


216       INDUSTRIAL  PENSION  SYSTEMS 


AvEBAGE  Percentage  of  Salary   Contribution 


Present 

Pension 
age,  70 

Pension 
age,  60 

Pension 
age,  55 

Per  cent 

Per  cent 

Per  cent 

15 

0.8 

1.6 

2.6 

25 

1.5 

2.8 

4.8 

35 

2.9 

5.5 

9.8 

45 

5.2 

10.8 

21.1 

In  the  case  of  a  system  of  paid-up  annuities  it 
is  necessary  to  have  a  stated  retirement  age  in 
order  to  enable  the  insurance  company  to  make 
its  calculations.  However,  it  may  easily  be  pro- 
vided that  the  worker  who  reaches  the  retirement 
age  and  who  is  still  able  to  perform  his  task  may 
defer  the  commencement  of  the  annuity  pay- 
ments until  he  is  incapacitated,  in  which  case  the 
yearly  installments  will  rise  rapidly.^     On  the 

^Thus  the  annual  payments  under  one  type  of  annuity 
policy  yielding  $10  at  age  65  increase  as  follows  if  not  drawn 
upon  until  a  later  year: 

Age  Males  Females 

65  $10.00  $10.00 

66  11.07  10.95 

67  12.30  12.03 

68  13.72  13.24 

69  15.36  14.63 

70  17.26  16.22 

On  the  other  hand,  such  an  annuity  policy  yielding  SIO  per 
year  at  age  65,  would  yield  only  the  following  amounts  if  pay- 
ments were  commenced  at  age  60,  61,  62,  63,  or  64,  respectively: 

Age  Males  Females 

60  S4.48  $4.48 

61  5.24  5.24 

62  6.17  6.17 

63  7.25  7.25 

64  8.49  8.49 


SCHEME  OF  BENEFITS  217 

other  hand,  it  can  be  provided  that,  if  necessary,, 
the  annuity  may  be  payable  before  the  stated  age. 
In  this  case,  as  already  made  clear,  the  install- 
ments of  the  annuity  will  be  very  sharply  reduced, 
since  the  insurance  company  not  only  loses  the 
interest  accumulation,  but  at  the  same  time  must 
figure  on  a  greater  expectancy  of  life. 


CHAPTER  X 

SUMMARY  AND  CONCLUSIONS 

From  the  preceding  discussion  it  is  apparent 
that  the  pension  problem,  even  in  its  narrower 
or  immediate  aspects,  is  an  exceedingly  compli- 
cated one.  Whatever  system  the  employer  may 
select,  he  is  confronted  with  perplexing  questions 
which  cannot  safely  be  disregarded. 

For  convenience,  some  of  the  major  points  de- 
veloped in  the  previous  chapters  are  brought  to- 
gether in  the  summary  analysis  on  pages  220 
to  223. 

Discussions  of  the  pension  problem  often  have 
hinged  largely  upon  the  question  whether  the 
proposed  system  was  of  the  contributory  or  non- 
contributory  type.  While  it  seems  exceedingly 
desirable  that  the  employee  shall  contribute  di- 
rectly to  the  cost  of  a  pension  system,  it  should 
be  repeated  that  this  matter  is  less  vital  than  the 
question  whether  the  system  recognizes  definite 
rights  on  the  part  of  the  worker.  Where  a  system 
is  operated  on  a  contributory  basis,  the  employer 
practically    is    compelled    to    recognize    certain 

rights.    Otherwise,  the  worker  presumably  would 

218 


SUMMARY  AND  CONCLUSIONS  219 

be  unwilling  to  contribute.  However,  if  the 
principle  of  deferred  pay  is  accepted — and  it  is 
difficult  to  see  where,  within  the  limits  stated  in 
Chapter  II,  that  principle  can  be  denied — the 
worker  in  reality  is  contributing  to  the  cost  under 
a  non-contributory  system.  The  essential  ques- 
tion, therefore,  is  not  whether  the  worker  con- 
tributes directly  but,  rather,  whether  the  pension 
system  definitely  and  adequately  safeguards  his 
rights  under  the  plan. 

It  has  been  shown  that  the  "discretionary" 
type  of  pension  system  has  been  generally  con- 
demned by  disinterested  critics,  not  merely  be- 
cause of  its  inadequacy  and  its  liability  to  abuse, 
but  on  the  more  fundamental  ground  that  it  does 
not  place  the  worker's  status  on  a  definite  con- 
tractual basis.  It  is  axiomatic  that  a  pension 
system  should  carry  all  reasonable  assurance  that 
the  pensions  will  be  paid.  To  quote  again  from 
the  Report  of  the  Special  Committee  of  the  Mer- 
chants' Association  of  New  York,  "A  pension 
promise  that  is  not  certain  involves  an  uncertain 
morality." 

The  issue  of  deferred  pay  is  vital.  To  the  ex- 
tent that  that  principle  is  actually  operative,  it 
seems  clear  that  a  pension  system  should  defi- 
nitely recognize  the  right  of  the  worker  to  a  return 
of  the  pay  so  deferred.    In  this  respect  the  "dis- 


220       INDUSTRIAL  PENSION  SYSTEMS 


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SUMMARY  AND  CONCLUSIONS 


221 


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222       INDUSTRUL  PENSION  SYSTEMS 


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SUMMARY  AND  CONCLUSIONS  223 


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224       INDUSTRIAL  PENSION  SYSTEMS 

cretionary"  type  of  pension  is  seriously  inade- 
quate and,  indeed,  may  be  grossly  inequitable. 
The  contributory  type  of  pension  system  usually 
meets  this  issue  in  part.  A  system  of  paid-up 
annuities  on  the  lines  described  in  Chapter  V 
should  meet  it  squarely,  regardless  of  whether  or 
not  the  worker  directly  contributes  to  the  cost 
of  the  plan. 

While,  however,  the  question  of  direct  contri- 
butions is  of  less  importance  than  the  question  of 
contractual  right,  the  contributory  system  is  to 
be  recommended  wherever  it  is  practicable.  Not 
only  will  workers  ordinarily  take  a  keener  interest 
in  the  plan,  but  they  can  feel  that  they  are  largely 
providing  for  their  superannuation  through  their 
own  effort. 

It  has  been  shown  that  the  employer  cannot 
reasonably  expect  a  pension  system  to  bring  tan- 
gible results  in  the  way  of  reduced  labor  turn- 
over, or  greater  contentment,  sufl5cient  to  justify 
its  administrative  burden  and  cost.  An  annuity 
system,  however,  because  of  its  greater  certainty 
and  more  direct  appeal,  may  have  an  important 
influence  on  labor  turnover. 

It  has  also  been  shown  that  the  use  of  pension 
systems  for  purposes  of  disciplinary  control  is 
likely   to  prove  disappointing  while,   moreover, 


SUMMARY  AND  CONCLUSIONS  225 

such  use  of  a  pension  system  is  inherently  ob- 
jectionable. 

The  one  controlling  incentive  to  adopt  a  re- 
tirement system  from  the  employer's  standpoint 
is  that  it  may  enable  him  more  readily  to  dismiss 
workers  who,  because  of  superannuation  or  other 
disability,  are  no  longer  able  to  perform  their 
tasks  and  who  reduce  the  efficiency  of  the  force 
as  a  whole.  While  other  results  of  a  pension  sys- 
tem may  be  important,  they  ordinarily  will  be 
incidental  to,  or  at  least  collateral  to,  this  main 
object. 

The  inevitable  tendency  of  expenditures  to  in- 
crease over  a  long  period  of  time  under  a  formal 
pension  system  should  be  clearly  appreciated.  An 
employer  who  decides  to  inaugurate  a  pension  or 
annuity  system  should  have  the  cost  most  care- 
fully estimated  by  competent  experts,  making 
certain  that  all  due  attention  is  given  to  the 
problem  of  "accrued  liabilities."  Practically  the 
only  safe  method  of  financing  a  formal  pension 
system  is  on  the  reserve  basis,  after  detailed  actu- 
arial calculations.  Even  then,  frequent  revalua- 
tions of  the  plan  will  be  necessary  to  safeguard 
its  solvency.  In  general,  the  only  safe  policy  is 
to  determine  the  benefits  on  an  actuarial  basis, 
by  the  amount  which  the  contributions  will  jus- 


226       INDUSTRIAL  PENSION  SYSTEMS 

tify,  and  not  to  make  them  directly  contingent 
upon  the  salary  or  wages  of  the  employee. 

The  too  common  practice  of  following  the  pro- 
visions of  some  plan  that  seems  attractive  is  an 
exceedingly  dangerous  one.  While  the  type  of 
plan  should  be  determined  on  broad  grounds  of 
equity  and  economic  soundness,  the  details  should 
be  worked  out  with  special  reference  to  the  needs 
of,  and  the  conditions  prevailing  in,  the  individ- 
ual establishment,  particularly  in  respect  to  age 
and  sex  distribution  and  labor  turnover.  Any  at- 
tempt to  apply  a  general  formula  is  practically 
certain  to  lead  to  disaster  in  a  large  majority  of 
cases.  Unless  an  employer  is  ready  to  assume 
the  burden  and  expense  of  thus  preparing  a  sys- 
tem adapted  to  his  individual  needs,  he  should 
avoid  committing  himself  to  the  adoption  of 
any  formal  system. 

Broader  Aspects  of  the  Pension  Problem 

From  the  standpoint  of  the  individual  em- 
ployer the  pension  problem  may  seem  to  be 
chiefly  one  of  costs  and  tangible  results.  In 
reality,  these  considerations  are  far  less  impor- 
tant than  the  fundamental  issues  of  social  and 
economic  policy  involved.  The  pension  issue  is, 
indeed,  one  of  the  broadest  and  most  far-reaching 


SUMMARY  AND  CONCLUSIONS         227 

of  the  many  perplexing  problems  arising  out  of 
the  industrial  relationship. 

Final  judgment  on  the  broad  question  as  to 
whether  any  system  of  pensions  is  desirable  in 
private  industry  will  depend  very  largely  upon 
the  attitude  of  the  critic  towards  the  labor  rela- 
tionship from  a  social  standpoint.  Those  who 
feel  that  it  is  desirable  that  wage  earners  shall  be 
responsible  for  their  own  destinies,  and  who  wish 
to  reduce  the  element  of  paternalism  on  the  part 
of  the  employer  to  a  minimum,  will,  in  general, 
be  opposed  to  private  industrial  pension  systems, 
at  least  unless  these  are  of  a  contractual  char- 
acter. They  will  be  receptive  to  the  argument 
that  most  pension  systems  keep  down  immediate 
or  money  wages  and  tend  at  the  same  time  to 
accentuate  class  distinctions  between  employers 
and  employees.  Such  critics,  if  consistent,  will 
take  the  position  that  even  though  the  task  of 
raising  the  real  wage  status  of  workers  as  a  whole 
may  be  slow,  in  the  long  run  Labor  will  be  bene- 
fited b^  meeting  the  situation  squarely  rather 
than  by  accepting  such  temporary  relief  as  may 
be  aJBforded  through  pension  systems,  at  least 
where  these  tal^e  the  form  of  a  gratuity.  Others, 
who  have  no  prejudice  against  pension  systems 
per  se,  often  may  be  inclined  to  oppose  the  ex- 


228       INDUSTRIAL  PENSION  SYSTEMS 

tension  of  such  systems  in  private  industry  until 
the  various  complexities  of  the  problem  have 
been  more  carefully  analyzed.  Experience  thus 
far  has  been  too  brief  and  too  limited  to  warrant 
final  conclusions  on  many  points.  As  the  Ap- 
pendix accompanying  this  volume  shows,  most 
private  industrial  pension  systems  are  of  com- 
paratively recent  origin.  Thus,  of  ninety-three 
pension  plans  there  listed,  only  ten  were  in- 
augurated prior  to  1910.  This  limited  experience 
would,  in  any  event,  necessitate  conservatism  in 
passing  judgment.  The  ultimate  results  of  such 
systems  can  be  determined  only  after  very  ex- 
tended operation.  A  further  consideration  in  this 
connection  is  that  many  students  of  the  pension 
problem  feel  that  it  is  not  one  to  be  undertaken 
by  employers  alone,  but  jointly  by  employers, 
employees,  and  the  general  public.  It  will  be 
remembered  that  several  of  the  authorities  cited 
in  Chapter  I  took  such  a  position. 

The  individual  employer,  faced  with  the  neces- 
sity of  retiring  aged  or  disabled  workers  who 
are  reducing  the  efl&ciency  of  his  force,  can  hardly 
be  blamed  for  not  waiting  until  the  problem  is 
worked  out  on  these  broad  lines,  or  for  adopting 
any  system  which  seems  to  promise  an  improve- 
ment over  a  continuation  of  existing  conditions  in 
his  establishment.     But  it  should  be  recognized 


SUMMARY  AND  CONCLUSIONS         229 

that  such  efforts,  however  well  meant,  may  prove 
unsatisfactory. 

It  may  fairly  be  said  that  most  pension  systems 
now  in  operation  do  not  make  a  substantial  ap- 
proach toward  solving  the  problem  of  old  age 
dependency  among  industrial  workers.  From  the 
evidence  presented  in  preceding  chapters,  it  is 
obvious  that  only  a  trifling  proportion  of  wage- 
earners  ever  go  on  the  pension  roll.  A  much 
larger  number,  although  spending  the  greater 
part  of  their  lives  in  industry,  become  separated 
from  the  service  without  any  retirement  benefit. 
If  Industry  is  to  undertake  to  deal  with  the  super- 
annuation problem  at  all,  it  may  fairly  be  re- 
quired to  devise  some  more  equitable  and  more 
effective  method  than  that  reflected  in  existing 
private  pension  practice. 

In  this  respect  the  annuity  system,  discussed  in 
Chapter  V,  has  a  particular  appeal,  and  especially 
if  its  introduction  could  be  made  general  among 
industrial  establishments.  With  such  a  system  in 
practically  universal  operation,  the  great  body  of 
wage-earners  would  be  making  some  provision 
for  support  in  old  age  and  (except  for  the 
"trial  service"  period)  pro  rata  with  every  year  of 
service  rendered.  Because  of  this  fact  the  annuity 
system  seems  entitled  to  most  serious  considera- 
tion, not  only  by  industrial  executives,  but  by  the 


230       INDUSTRIAL  PENSION  SYSTEMS 

public  at  large.  If,  instead  of  pensioning  off  a 
mere  handful  of  superannuated  workers,  a  system 
can  be  devised  by  which  the  great  majority  of 
these  workers  will  have  acquired  a  substantial  pro- 
vision against  old  age  by  the  time  they  become 
superannuated,  then  society  as  a  whole,  as  well 
as  these  individuals,  should  reap  a  substantial 
benefit,  while  the  burden  would  be  distributed  in- 
stead of  falling  on  the  last  employer. 

Under  such  a  condition  it  should  be  possible  to 
effect  a  material  reduction  in  the  cost  of  poor 
relief,  which  is  a  very  important  factor  in  the 
tax  bill  of  every  community.  More  important 
than  this  possible  reduction  in  taxes,  however,  is 
the  fact  that  the  great  body  of  wage-earners  could 
feel  that  their  income  in  old  age  had  been  fairly 
earned  by  their  service  during  their  productive 
years.  The  difference  in  the  effect  upon  national 
character  of  having  these  workers  thus  virtually 
self-supporting  in  their  old  age,  instead  of  objects 
of  charity,  or  recipients  of  gratuities,  can  hardly 
be  over-estimated. 


APPENDIX  I 

ANALYSIS    OF    PENSION    PLANS    IN    INDUSTRIAL 
ESTABLISHMENTS 

Note 

The  following  tables  give  a  brief  analysis  of  im- 
portant features  of  those  pension  plans  of  industrial 
establishments  assembled  in  the  course  of  this  study. 

Because  of  the  numerous  details  in  any  given  pen- 
sion plan  and  the  great  variation  in  provisions  as 
between  different  plans,  it  is  impracticable  to  present 
all  the  facts  in  such  a  condensed  comparative  analy- 
sis. For  example,  the  age  and  service  requirements 
contained  in  the  plan  of  one  large  company  are  as 
follows : 

(a)  "Any  male  employee  when  he  shall  have 
reached  the  age  of  seventy  years,  and  any  female 
employee  when  she  shall  have  reached  the  age  of 
sixty-five  years,  shall  be  required  to  retire,  irrespec- 
tive of  length  of  service. 

(t>)  "Any  male  employee  when  he  shall  have 
reached  the  age  of  sixty-five  years,  and  any  female 
employee  when  she  shall  have  reached  the  age  of 
sixty  years,  who  in  either  case  shall  have  been  in  the 
continuous  service  of  the  Company  twenty  years  or 
more,  may,  at  the  request  of  the  employee,  subject 
to  the  approval  of  the  Executive  Committee,  be  re- 
tired from  active  service. 

231 


232       INDUSTRIAL  PENSION  SYSTEMS 

(c)  "Any  male  employee  when  he  shall  have 
reached  the  age  of  sixty  years,  and  any  female  em- 
ployee when  she  shall  have  reached  the  age  of  fifty- 
five  years,  who  in  either  case  shall  have  been  in  the 
continuous  service  of  the  Company  for  twenty-five 
years  or  more,  may,  at  the  request  of  the  employee, 
subject  to  the  approval  of  the  Executive  Committee, 
be  retired  from  active  service. 

(d)  "Any  male  or  female  employee  who  shall  have 
been  thirty  years  or  more  in  the  continuous  service 
of  the  Company,  may,  at  the  request  of  the  employee, 
subject  to  the  approval  of  the  Executive  Committee, 
be  retired  from  active  service. 

(e)  "Any  employee  who  shall  have  been  fifteen 
years  or  more  in  the  service  of  the  Company,  and  who 
shall  have  become  permanently  totally  incapacitated 
through  no  fault  of  his  or  her  own,  as  the  result  of 
sickness  or  injury  (compensation  for  which  has  not 
otherwise  been  provided),  may,  at  the  request  of  the 
employee,  subject  to  the  approval  of  the  Executive 
Committee,  be  retired  from  active  service." 

To  give  all  the  information  with  respect  to  age  and 
service  requirements  for  a  large  number  of  companies 
would  have  made  the  tabulation  so  unwieldy  as  to  be 
almost  unreadable.  Instead,  effort  has  been  made 
to  give  the  age  and  service  requirements  that  would, 
as  a  matter  of  practical  experience,  be  most  generally 
applicable.  Thus,  in  the  case  of  the  plan  above 
quoted,  the  age  and  service  requirements  are  given 
in  the  table  as  sixty-five  and  twenty,  respectively, 
for  males,  and  sixty  and  twenty,  respectively,  for 
females,  as  it  seems  reasonably  certain  that  more 
workers  would  be  retired  under  these  provisions  than 
under  provision  (a),  which  requires  an  age  of  seventy 


APPENDIX  I  233 

for  males  and  an  age  of  sixty-five  for  females,  or 
under  provision  (c),  which  reduces  the  age  limit,  but 
increases  the  required  ser^dce  period  to  twenty-five 
years. 

It  should  be  understood,  therefore,  that  in  most 
cases  the  plans  contain  other  provisions  than  those 
listed  in  the  table.  Most  plans,  moreover,  contain 
exceptions,  or  special  provisions.  In  order  to  get 
complete  information  in  any  specific  case  it  is  neces- 
sary to  refer  to  a  copy  of  the  plan  itself. 

It  will  be  noted  in  the  first  column  under  the  head- 
ing "Amount  of  Pension"  there  is  given  a  percentage 
of  the  average  salary  for  the  final  ten  years  which 
is  to  be  multiplied  by  the  number  of  years  of  service. 
Thus  if  the  average  annual  wage  for  such  a  ten-year 
period  were  $1,000  and  the  pension  one  per  cent  of 
this  for  every  year  of  service,  the  total  pension  in  the 
case  of  a  worker  with,  say,  thirty  years  of  service, 
would  be  $300,  as  follows: 

Average  wage  for  final  ten  years $1,000 

One  per  cent  of  this 10 

For  thirty  years  of  service  the  total  pension 

would  be    300 

The  use  of  the  final  wage  for  ten  years  of  service  is 
80  common  that  this  has  been  taken  as  a  standard. 
In  many  cases,  however,  the  average  wage  for  the 
final  five  years,  or  the  final  three  years,  of  service 
(or  some  other  period)  is  used  as  a  basis.  Such  cases 
have  been  indicated  by  inserting  in  parentheses  the 
number  of  years  actually  taken  as  a  basis. 

With  respect  to  maximum  and  minimum  amounts 
of  a  pension,  it  should  be  noted  that  sometimes  this 


234       INDUSTRIAL  PENSION  SYSTEMS 

is  a  given  percentage  of  such  average  wage  for  the 
final  ten  years  (or  other  period),  and  that  sometimes 
this  is  limited  by  a  fixed  maximum.  Thus,  in  the 
case  of  the  American  Brass  Company  the  maximum 
is  sixty  per  cent  of  the  average  salary  for  the  final 
three  years  of  service,  provided  this  amount  does 
not  exceed  $5,000. 

Where  it  was  known  that  the  company  had  a  group 
insurance  plan  in  force,  this  fact  has  been  indicated 
under  the  column  headed  "Death  Benefit  Provision," 
but  since  the  number  of  companies  adopting  such 
plans  is  constantly  increasing,  the  information  on  this 
point  may  not  be  complete. 

An  examination  of  this  appendix  table  shows  that 
a  service  requirement  of  twenty  years  is  very  com- 
mon, and  that  a  shorter  period  is  infrequent.  Service 
requirements  of  twenty-five  years  are  fairly  frequent, 
and  are  found  in  connection  with  an  age  limit  of 
sixty-five  years,  as  well  as  of  sixty  years.  In  many 
cases,  as  already  indicated,  the  same  plan  provides 
both  for  an  age  requirement  of  sixty-five  years  with 
twenty  years  of  service,  and  for  an  age  requirement 
of  sixty  years  with  twenty-five  years  of  service,  or 
some  other  arrangement. 

The  age  requirement  for  women  frequently  is  five 
or  ten  years  less  than  that  for  men,  or,  in  other  words, 
frequently  is  fifty-five,  or  even  fifty  years. 

A  considerable  number  of  plans  provide  for  com- 
pulsory retirement;  in  a  majority  of  such  cases  this 
is  fixed  at  seventy  years. 

In  many  plans  provision  is  made  for  retirement  at 
the  request  of  the  employee  when  he  has  fulfilled 


APPENDIX  I  235 

the  terms  of  the  plan.  In  such  cases  the  pensionable 
age  is  either  sixty  years  or  sixty-five  years.  In  gen- 
eral, the  plan  reserves  the  right  to  the  employer  to' 
retire  a  worker  at  the  discretion  of  the  Pension  Board 
or  Committee;  in  some  cases,  however,  it  is  provided 
that  the  worker  shall  not  be  arbitrarily  retired  against 
his  own  wishes. 

In  general,  where  a  minimum  allowance  is  stipu- 
lated, this  is  $18  or  $20  per  month;  a  minimum  of 
$300  per  year  is  provided  in  a  number  of  cases. 
Maximum  provisions  vary  widely.  One  plan,  that 
of  the  Midvale  Steel  &  Ordnance  Company,  provides 
for  a  flat  pension  of  $30  per  month  in  all  cases. 


236       INDUSTRIAL  PENSION  SYSTEMS 


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238       INDUSTRIAL  PENSION  SYSTEMS 


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APPENDIX  II 

SELECTED   BIBLIOGRAPHY 

No  attempt  has  been  made,  in  preparing  this  bibli- 
ography, to  compile  an  extended  list  of  works  on 
the  subject  of  pensions,  but,  instead,  merely  to 
include  a  selected  number  of  books  and  articles  which 
seem  of  particular  value  to  the  employer  who  may 
be  considering  the  adoption  of  a  pension  plan,  or  to 
the  general  student  of  the  subject. 

General 

Industrial  Pensions.  Merchants'  Association  of  New 
York,  1920.  Report  of  Special  Conmiittee  on 
Industrial  Pensions  and  Report  of  a  Survey  of 
Industrial  Pension  Systems  by  the  Industrial 
Bureau  of  the  Association. 

A  brief,  but  valuable,  discussion. 

Old  Age  Dependency  in  the  United  States.  Lee  Well- 
ing Squier.  1912.  A  general  survey  of  the  pen- 
sion movement  up  to  that  time. 

Principles  Governing  the  Retirement  of  Public  Em- 
ployees.   Lewis  Mcriam.    1918. 

While  dealing  with  pensions  in  the  public  serv- 
ice, this  work  is  of  great  value  to  the  student  of 
private  pension  systems.  A  special  feature  is  the 
frequent  reference  to  other  literature  on  the  pen- 
sion problem. 

251 


252       INDUSTRIAL  PENSION  SYSTEMS 

Pensions  for  Hospital  Officers  and  Staffs.  Sub-Com- 
mittee of  the  Executive  Committee  of  King 
Edward's  Hospital  Fund  for  London.     1919. 

An  elaborate  work  containing  a  large  amount 
of  material  on  the  operation  of  various  British 
pension  funds,  as  well  as  a  discussion  of  the 
broader  phases  of  the  problem. 

Reports  of  the  Carnegie  Foundation  for  the  Advance- 
ment of  Teaching.  Nearly  all  the  annual  reports 
of  the  Foundation  contain  references  to  the  pen- 
sion problem.  Special  mention  may  be  made  of 
Bulletin  No.  Nine  (1916),  "A  Comprehensive 
Plan  of  Insurance  and  Annuities  for  College 
Teachers,"  by  Henry  S.  Pritchett,  President  of 
the  Foundation,  and  Bulletin  No.  Eleven,  "Pen- 
sions for  Public  School  Teachers,"  by  Clyde  Furst 
and  I.  L.  Kandel. 

Teachers'  Retirement  Systems  in  the  United  States. 
Paul  Studensky.    1920. 

Official  Reports 

U.  S.  Government.  Retirement  of  Employees  in  the 
Classified  Civil  Service.  Various  Hearings  before 
the  Senate  Committee  on  Civil  Ser\'ice  and  Re- 
trenchment and  the  House  Committee  on  Reform 
in  the  Civil  Service. 

Retirement  from  the  Classified  Civil  Service  of  Super- 
annuated Employees. 

Message  from  the  President  of  the  United 
States  transmitting  Report  of  the  Commission  on 
Economy  and  Efficiency  on  this  subject.  House 
Document  No.  732,  62nd  Congress,  2nd  Session. 

Illinois:  Report  of  Illinois  Pension  Laws  Commission, 
1916;  Report  of  Illinois  Pension  Laws  Commis- 
sion, 1918-1919. 


APPENDIX  II  253 

Massachusetts:  Report  of  Commission  on  Old  Age 
Pensions,  Annuities,  and  Insurance.  1910.  House 
Document  No.  1400. 

Report    of    Commission    on    Pensions.    1914. 
House  Document  2450. 

Pennsylvania:  Report  of  Pennsylvania  Commission 
on  Old  Age  Pensions.    1919. 

Wisconsin:  Report  of  Wisconsin  Pension  Laws  Com- 
mission. 

New  York  City:  Report  of  Commission  on  Pensions: 
The  Pension  Funds  of  the  City  of  New  York. 


Magazine  Articles  and  Pamphlets 

Broadening  the  Scope  of  Pensions  in  Private  Indus- 
try: Paul  Studensky.  "New  Jersey."  Vol.  VI, 
No.  8.    New  Jersey  Bureau  of  State  Research. 

Industrial  Pensions:  Russell  Sage  Foundation,  De- 
cember, 1919.     A  brief  bibliography. 

Industrial  Retirement  Systems  Based  on  the  Money 
Purchase  Principle.  J.  H.  Woodward.  In  Eco- 
nomic World,  December  3  and  December  10,  1921. 

Our  New  Peonage:  Discretionary  Pensions.  L.  D. 
Brandeis  in  his  "Business  a  Profession,"  1914. 

Problem  of  Pensions:  National  Civic  Federation, 
1916.  Contains  a  tabulated  analysis  of  various 
plans. 

Pensions  as  Wages:  Albert  de  Roode.  American 
Economic  Review,  March,  1913.  An  exception- 
ally concise  discussion  of  the  subject. 


254       INDUSTRIAL  PENSION  SYSTEMS 

The  Fundamental  Principles  of  Pension  Funds: 
James  J.  M'Lauchlan.  Transactions  of  the 
Faculty  of  Actuaries  (London),  1909,  Volume  IV, 
Part  VIII,  No.  41. 

The  Pension  Problem  and  the  Philosophy  of  Contri- 
butions: Paul  Studensky.  1917.  Bureau  of 
Municipal  Research,  New  York  City. 


INDEX 


Accrued  liabilities :  cost  of  meeting,  172-175 ;  definition, 
172;  methods  of  meeting  under  annuity  system,  192- 
197;  under  pension  systems,  173-174;  relation  to  de- 
ferred-pay issue,  176;  to  payroll,  174,  175,  194 

Actuarial  problems:  difficulties  of,  144-145;  frequent 
revisions  of  estimates  necessary,  145,  181 ;  need  of 
expert  assistance,  180;  Merchants'  Association  of  New 
York,  report  cited,  180;  simplified  under  an  annuity 
system,  184-185 ;  uncertainties  of,  181-184 

Advantages  and  disadvantages  of  various  types  of  pension 
systems  compared,  220-223 

Age  of  retirement:     (see  Eetirement  Age) 

American  Sugar  Eefining  Company :  pension  disburse- 
ments of,  163 

Annuity  system :     (see  Cumulative  Annuity  System) 

Baltimore  &  Ohio  Eailroad  Co:     pension  disbursements 

of,  161 
Benefits  under  retirement  systems :  amount  of  in  typical 

plans,  211;   influence  of  retirement  age  on,  216,  217; 

death  benefit,  48,  204,  205;  retirement  benefit,  201,  202; 

sickness  benefit   inadvisable,   208,   209;    total   disability 

benefit,  203;  widows'  and  children's  benefits  inadvisable, 

209,  210;  withdrawal  equities,  206-208 
Brandeis,  Louis  D :  quoted,  44,  45,  63 
British     Civil     Service     plan :     deferred-pay     principle 

endorsed,  60 
British  Board   of  Trade  Committee  on   Superannuation 

Funds  :     testimony  before,  59 
British  Royal  Commission  on  Superannuation  and  Civil 

Service :     testimony  before,  59 

Cammack,  E.  E  :    quoted,  175 
Carver,  T.  N :    quoted,  13 

255 


256  INDEX 

Carnegie  Foundation  for  the  Advancement  of  Teaching: 
reorganization  of  pension  plan,  2;  reports  quoted,  52, 

93,  101,  106,  161,  172 
Children's  benefits:     (see  Benefits) 
Commons,  John  R :    quoted,  8 

Contractual  rights:  importance  of,  48,  93,  112,  218; 
involve  provision  for  withdrawal  equities,  91,  206;  lack 
of,  under  some  systems,  47,  50,  67,  73,  81 

Contributions,  employers':  incidence  of,  63;  (see  also 
Deferred-Pay  Principle) 

Contributions,  return  of:     (see  Withdrawal  Equities) 

Contributory  pension  systems:  advantages  of,  94;  atti- 
tude of  pension  authorities,  94;  attitude  of  various 
Commissions  toward,  104;  benefits  usually  included 
under,  93;  conclusions  summarized,  107,  109;  contribu- 
tory feature  not  the  vital  issue,  149,  218;  deferred-pay 
issue  under,  97;  defined,  48,  93;  demand  for  joint 
management  likely;  106;  disadvantages  of,  105;  effect 
on  thrift,  101;  employees'  contributions  essentially 
savings,  98 ;  employers'  contributions  seldom  returnable, 
100;  industrial  goodwill  promoted  by,  99;  Meriam, 
Lewis,  quoted,  100;  M'Lauchlan,  James  A.,  quoted,  100; 
Pritchett,  H.  S.,  quoted,  94;  progress  of,  102,  104; 
seldom  used  in  industrial  establishments,  49;  Squier, 
Lee    Welling,    quoted,    95;    Studensky,    Paul,    quoted, 

94,  95 

Contributory  principle:  applicable  to  annuity  system, 
116 ;  not  vital  factor  in  costs,  149,  218 

Costs  of  retirement  systems:  (see  also  Accrued 
Liabilities) 

Cost  of  cumulative  annuity  system:  accrued  liabilities 
under,  192-197;  changes  in  cost  gradual,  188,  190;  close 
estimates  practicable,  190 ;  cost  of  flat-rate  and  single- 
premium  systems  contrasted,  191,  192;  effect  of  labor 
turnover  on,  186;  illustrative  computation  of,  189; 
methods  of  reducing,  195 

Cost  of  informal  pension  policy:    138,  177-179 

Cost  of  pension  systems :  actuarial  analysis  essential,  145 ; 
advantages  of  reserve  method,  148;  contributory  fea- 
ture not  controlling  factor,  149;  cost  of  death  and 
withdrawal  benefits,  149-154;  cost  of  meeting  accrued 
liabilities,  172-175;  difficulty  of  determining,  144;  ex- 
perience of  American  Sugar  Refining  Co.,  163-164;  of 


INDEX  257 

Baltimore  &  Ohio  E.  R.  Co.,  158-163;  of  Otis  Elevator 
Co.,  164-165;  of  U.  S.  Steel  Corporation,  165-170; 
frequent  "revaluations"  necessary,  148,  155 ;  long  con- 
tinued increase  in,  156;  methods  of  meeting,  146,  147; 
relation  of  contributory  feature,  149;  relation  of  cost 
to  payroll,  150-152 
Courtney    Commission    of    Great    Britain:      quoted,    69; 

testimony  before,  58 
Cumulative  annuity  system:  accrued  liabilities  under, 
192,  197;  arguments  against,  analyzed,  118;  arguments 
in  favor  of,  113-116;  benefits  under,  111;  contractual 
basis  essential,  112;  contrasted  with  pension  systems, 
112;  contributory  principle  applicable,  116;  cost  of 
(see  Cost  of  Eetirement  Systems),  192-195;  cost  of 
annuity  policies  for  males,  120;  costs  governed  by 
service,  125;  deferred  pay  issue  under,  116;  disadvan- 
tages of,  118,  122,  126 ;  effect  of  labor  turnover  on,  186 ; 
effect  on  morale  of  worker,  114,  196;  effect  on  thrift, 
116;  general  features.  111;  methods  of  reducing  em- 
ployees' contribution,  124;  modification  easy  to  make, 
117;  payments  not  a  gratuity,  112;  possible  effect  on 
national  character,  230 ;  on  taxation,  230 ;  primary  object 
of,  112,  113;  withdrawal  equities  under,  119,  200 

Death  benefit:     (see  Benefits) 

Deferred-pay  principle:  application  of  under  informal 
policy,  133 ;  arguments  against,  61 ;  conclusions  as  to 
effect  on  wages,  67 ;  conclusions  as  to  scope,  64-66 ; 
contention  that  it  is  conditional,  68 ;  de  Roode,  Albert, 
quoted,  57 ;  general  discussion  of,  53-86 ;  Hadley,  A.  T., 
quoted,  63 ;  Illinois  Pension  Laws  Commission,  quoted, 
54;  Lecky,  W.  E.  H.,  quoted,  56;  Limitations  of,  05; 
Massachusetts  Commission  on  Pensions,  quoted,  55 ; 
Meriam,  Lewis,  quoted,  55;  met  by  cumulative  annuity 
system,  116 ;  Mowatt,  Sir  Francis,  quoted,  58 ;  not 
applicable  to  accrued  liabilities,  176;  Pennsylvania 
Commission  on  Old  Age  Pensions,  quoted,  55 ;  Pritchett, 
Henry  S.,  quoted,  56;  relation  of  amount  of  pension  to, 
66;  Special  Committee  of  Executive  Committee  of  King 
Edward's  Hospital  Fund  for  London,  quoted,  57; 
United  States  Commission  on  Economy  and  Efficiency, 
quoted,  55;  vital  importance  of,  219 

deRoode,  Albert :  quoted,  57,  68,  70 


258  INDEX 

Devine,  Edwin  T :     quoted,  14 

Disability  benefits:     (see  Benefits) 

Discipline:  not  sought  under  an  annuity  system,  113; 
pensions  as  a  means  of  securing,  41-45;  Vanderlip, 
Frank  A.,  quoted,  42 

Discretionary  pension  systems:  abuses  of,  25,  26,  82,  85; 
abuses  sometimes  avoided,  84 ;  advantages  of,  82 ;  con- 
ditional character  of,  50,  80;  criticism  of,  by  L.  D. 
Brandeis,  44;  by  Merchants'  Association  of  New  York, 
81,  82;  general  discussion  of,  50-86;  right  to  abandon 
plan  essential,  81;  summarization  of,  79,  80;  typical 
clauses  in,  51 

Drage,  Geoffrey:    quoted,  1 

Efficiency :  a  chief  object  of  pensions  systems,  28,  29,  33, 
34,  225;  effect  of  annuity  system  on,  114;  effect  of 
pension  systems  on,  33-36;  Mass.  Pension  Commissions 
quoted,  33,  34;  Merchants'  Association  of  New  York 
quoted,  36 ;  various  opinions  in  re,  35 

Employers'  contribution :  relation  to  withdrawal  equities, 
89,  207 

Farnam,  Henry  W:     quoted,  13 
Fetter,  Frank  A:    quoted,  9 
Fitch,  John  A  :    quoted,  16,  62 

Giddings,  Franklin  H :    quoted,  9 

Gompers,  Samuel :     quoted,  22,  40,  41 

Goodwill,  industrial :     promoted  by  contributory  pension 

systems,  99 
Government  employees :    attitude  toward  pension  systems, 

21 
Gratuities:     not  a  feature  of  annuity  system,  119,  128; 

pensions  often  regarded  as,  50,  52 

Hadley,  A.  T :    quoted,  12,  63 

Illinois  Pension  Laws  Commission :     quoted,  54,  103 
Industry :    responsibility  of,  under  pension  systems,  9,  11, 

210,  229 
Informal  pension  policy:  (see  also  Pension  Systems), 
138 ;  advantages  claimed  for,  133 ;  cost  of,  138 ;  cost  of, 
illustrative  example,  178;  deferred-pay  issue  under,  133; 
disadvantages  urged  against,  134;  may  not  be  adaptable 
to  a  large  establishment,  143;  may  facilitate  hiring  of 


INDEX  259 

older  workers,  136;  Merchants'  Association  of  New 
York  quoted,  139-140;  not  adapted  to  government  ser- 
vice, 137;  not  the  equivalent  of  a  formal  system,  143 
Insurance  companies :  utilized  under  annuity  system, 
112,  115,  185 

King,  George:    quoted,  3,  182 

Labor:  attitude  of  toward  pension  systems,  18-23,  129; 
Gompers,  Samuel,  quoted,  22,  40 

Labor  turnover :  Brandeis,  Louis  D.,  quoted,  44 ;  effect 
of  annuity  system  on,  114,  196 ;  effect  of  pension  systems 
on,  37-41 ;  effect  of  withdrawal  equities  on,  90 ;  Gompers, 
Samuel,  quoted,  40;  Merchants'  Association  of  New 
York,  quoted,  39;  opinions  of  employers,  38;  Squier, 
Lee  Welling-,  quoted,  44 

Lathrop,  Miss  Julia  C :    quoted,  15 

Lecky,  W.  E.  H :    quoted,  16,  56,  76 

Leiserson,  William  M :    quoted,  9 

"Limited-Contractual"  pension  systems :  advantages  and 
disadvantages  summarized,  91-92 ;  contractual  feature 
often  limited,  89;  definition  of,  47,  48,  87;  employers' 
latitude  under,  87;  not  in  common  use,  89;  typical 
clauses  in,  88 

Massachusetts  Commission  on  Old  Age  Pensions,  Annui- 
ties and  Insurance:     quoted,  30,  33-34,  75,  103 

Massachusetts  Commission  on  Pensions :  quoted,  34, 
55,  73 

Merchants'  Association  of  New  York :  report  quoted,  35, 
36,  39,  81,  82,  139-140,  172,  180,  219 

M'Lauchlan,  James  A :    quoted,  100,  200 

Meriam,  Lewis :    quoted,  18,  27,  30,  55,  72,  100,  207 

Mobility  of  Labor:     (see  Labor  Turnover) 

Model  pension  fund:  recommended  by  James  A. 
M'Lauchlan,  100 

Mo  watt.  Sir  Francis :    quoted,  58 

National  Civic  Federation :     quoted,  104 

New  Jersey  Bureau  of  State  Research :  quoted,  74,  95,  96 

Non-contributory   "discretionary"   pension   system :      (see 

Discretionary  Pension  Systems) 
Non-contributory   "limited-contractual"  pension  systems: 

(see  "Limited-Contractual"  Pension  Systems) 


260  INDEX 

Non-contributory  pensions :  contention  that  these  are 
mere  gratuities,  50 

Objects  of  pension  systems:     (see  Pension  Systems,  pur- 
poses of) 
Otis  Elevator  Co:    pension  disbursements  of,  165 

Payroll :     relation  of  contributions  to,  150-153 

Pennsylvania  Commission  on  Old  Age  Pensions :  quoted, 
55,  103 

Pensions :  amount  of  important,  66  (see  also  Benefits) ; 
irrevocable  nature  of,  1 ;  not  intended  to  promote 
idleness,  27;  pensions  vs.  pension  systems,  52  (see  also 
Deferred-Pay  Principle)  ;  social  aspects  of,  2,  227-230 ; 
uncertain  definitions  of,  3 

Pension  systems :  abuses  of,  72,  82,  85 ;  actuarial  analysis 
essential,  145,  180;  advantages  and  disadvantages  of 
various  types  summarized,  220-223;  advantages  of 
reserve  method,  148;  arbitrary  changes  in,  84,  85; 
benefits  to  be  included,  200;  broader  aspects  of,  226; 
comparison  with  annuity  system,  112,  184,  197,  220- 
230;  contributory  feature  not  controlling  factor,  149, 
224,  cost  of  (see  Cost  of  Pension  Systems) ;  cost  of 
death  and  withdrawal  benefits,  149-154;  cost  of  meeting 
accrued  liabilities,  172-175;  effect  on  strikes,  41-43;  on 
labor  turnover,  37-41 ;  experience  of  American  Sugar 
Eefining  Co.,  163-164;  of  Baltimore  &  Ohio  E.  R.  Co., 
158-163;  of  Otis  Elevator  Co.,  164-165;  of  U.  S.  Steel 
Corporation,  165-170 ;  frequent  unsoundness  of,  1 ;  in- 
adequacy of,  171,  229;  inequities  under,  25,  229;  public 
vs.  private,  3,  31-32;  purposes  of,  4,  45;  relation  of  cost 
to  payroll,  150-152;  types  of,  defined,  47-48 

Peters,  Michael:     quoted,  206 

Pritchett,  H.  S  :    quoted,  56,  94 

Purposes  of  pension  systems:     (see  Pension  Systems) 

Retirement  age :  arbitrary  age  objectionable,  214 ;  attitude 
of  employees  toward,  215;  often  a  source  of  inequity, 
84;  relation  to  benefits  under  an  annuity  system,  213; 
relation  to  cost  of  pensions,  216 

Retirement  systems :  (see  Pension  Systems,  Cumulative 
Annuity  System,  Informal  Pension  Policy) 

Return  of  contributions:     (see  Withdrawal  Equities) 


INDEX  261 

Reward-of-service  theory:  one  purpose  of  pension  sys- 
tems, 24;  inadequately  met  by  many  systems,  25;  vital 
feature  of  annuity  system,  113 

Rights  of  workers  under  pension  systems:  (see  De- 
ferred-Pay Principle) 

Ripley,  W.  Z :     quoted,  15 

Ran,  Rev.  John  A :    quoted,  10 

Seager,  Henry  R:    quoted,  77 
Sickness  benefits:     (see  Benefits) 
Social  aspects  of  pension  systems:    2,  3,  227-230 
Social  insurance:     13 

Special    Committee    of    Executive    Committee    of    King 
Edward's  Hospital  Fund  for  London;     quoted,  58,  70, 
174 
Squier,  Lee  Welling:    quoted,  7,  44,  86,  95 
Strikes :    use  of  pension  systems  to  discourage,  42-45 
Studensky,  Paul:    quoted,  95,  98,  99,  104,  174 
Superannuation :     moral  obligation  of  employer  in  re,  9 ; 
not  adequately  provided  for  by  ordinary  pension  sys- 
tems, 171,  230;  not  chief  concern  of  annuity  system, 
113;  obligation  of  public,  9;  of  industry,  9;  of  govern- 
ment, 17;  various  opinions  cited,  9-16 

Thrift :  attitude  of  Labor  toward,  12 ;  Carnegie  Founda- 
tion quoted,  101 ;  effect  of  annuity  system  on,  116 ;  of 
contributory  systems  on,  101 ;  of  non-contributory  sys- 
tems on,  75-77 

Tolsted,  Elmer  B :    quoted,  1,  153 

Tontine  features  of  non-contributory  pension  systems: 
72-74 

Turnover:     (see  Labor  Turnover) 

United  States  Commission  on  Economy  and  Efficiency: 

quoted,  31,  32,  55 
U.  S.  Government  pension  systems :     cited,  103 
United  States  Steel  Corporation  pension  plan :     descrip- 
tion of,  166;  effect  of  changes  in,  167,  168;  inadequacy 
of,    170;    number    of    workers    pensioned    under,    166; 
pension  disbursements  under,   166 

Vanderlip,  Frank  A:     quoted,  42 

Wages:  effect  of  pension  systems  on,  63,  67,  79,  96,  97; 
Hadley,  A.  T.,  quoted,  63 


262  INDEX 

Widows'  benefits :    (see  Benefits) 

Willcox,  William  R :    quoted,  104 

Wisconsin  Pension  Commission :     cited,  55,  103 

Withdrawal  equity :  absence  of  results  in  tontine  feature, 
72-74,  91 ;  attitude  of  pension  authorities  toward,  91, 
100;  effect  of  annuity  system  on,  116;  effect  of  contribu- 
tory system  on,  100;  effect  on  labor  turnover,  90;  justi- 
fication of,  91 ;  seldom  found  in  non-contributory  sys- 
tems, 89,  91 

Woodward,  J.  H:    quoted,  196 


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